If UIP holds, then returns on foreign investments (the carry trade) would be:
A) greater than 10%.
B) equal to the return from investment plus the appreciation of the home currency.
C) equal to the return from investment minus appreciation of the home currency.
D) equal to the reciprocal of the appreciation of the home currency.

Question

Quizplus · Accepted Answer

According to UIP, the return on foreign investments would be equal to the return from investment minus the appreciation of the home currency. This is because in a world of free capital flows, any difference in returns between two investments would be eliminated by investors seeking higher returns, which would result in an equalization of returns across countries. Therefore, the only difference in returns that would exist would be due to the change in currency values, which would result in the reduction of returns in the home currency.

If UIP Holds, Then Returns on Foreign Investments (The Carry