Uncovered interest parity may actually result in domestic interest rates being ____ than foreign rates because of investors' perceived risk of holding assets based in the domestic currency.
A) lower
B) more unstable
C) higher
D) more stable

Question

Quizplus · Accepted Answer

Uncovered interest parity suggests that the expected return on domestic assets should be equal to the expected return on foreign assets in a world without currency risk. However, investors may perceive greater risk in holding assets denominated in the domestic currency, leading them to demand higher returns to compensate for that risk. This can result in domestic interest rates being higher than foreign interest rates, despite uncovered interest parity.

Uncovered Interest Parity May Actually Result in Domestic Interest Rates