In equilibrium, the interest parity condition requires that:
A) all rates of returns will equalize.
B) all spot and forward rates will equalize.
C) the home interest rate minus its expected rate of currency depreciation (against the foreign country) will equal the foreign interest rate on similar assets.
D) all rates of returns and forward rates will equalize.

Question

Quizplus · Accepted Answer

The interest parity condition states that the difference between the home interest rate and the expected rate of currency depreciation (against the foreign country) should be equal to the foreign interest rate on similar assets in order to achieve equilibrium. Therefore, option C is the correct answer. Option A, B, and D are incorrect because they do not accurately reflect the interest parity condition.

In Equilibrium, the Interest Parity Condition Requires That