Asked by Brandt Cortina on Jun 28, 2024
Verified
Based on the theory of interest rate parity, the percentage forward premium or discount is approximately equal to the difference in _______ interest rates.
A) Nominal risk-free.
B) Real risk-free.
C) Nominal risky.
D) Real risky.
E) Inflation-adjusted.
Interest Rate Parity
A financial theory stating that the difference in interest rates between two countries is equal to the difference between the forward and spot exchange rates of their currencies.
Nominal Risk-Free
The rate of return on an investment with no risk of financial loss, not adjusted for inflation.
- Understand the theories of purchasing power parity (PPP) and interest rate parity (IRP) and their application in predicting currency movements.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
A
Explanation :
Interest rate parity theory suggests that the forward exchange rate should incorporate the difference in nominal risk-free interest rates between two countries, as it reflects the opportunity cost of capital without considering the risk of default.
Learning Objectives
- Understand the theories of purchasing power parity (PPP) and interest rate parity (IRP) and their application in predicting currency movements.
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