Asked by karamjeet singh on May 07, 2024
Verified
Interest rate parity states that there is a relationship between _____, ______, and _____.
A) Relative inflation rates; spot exchange rates; forward exchange rates.
B) Relative inflation rates; relative interest rates; forward exchange rates.
C) Exchange rate arbitrage; interest rate arbitrage; spot exchange rates.
D) Nominal interest rates; real interest rates; risk-free rates.
E) Relative interest rates; spot exchange rates; forward exchange rates.
Interest Rate Parity
A theory which posits that the disparity in interest rates across two nations is identical to the discrepancy between the forward exchange rate and the current spot exchange rate.
Exchange Rate Arbitrage
A strategy involving the simultaneous purchase and sale of a currency to exploit differences in its price in different markets, aiming for a risk-free profit.
- Comprehend the mechanisms and implications of interest rate parity.
Verified Answer
AA
Aileen AizenshtatMay 10, 2024
Final Answer :
E
Explanation :
Interest rate parity is a theory that suggests a strong relationship between interest rates of two countries (relative interest rates), the spot exchange rate, and the forward exchange rate between those two countries. This principle helps in predicting the movement in the exchange rates based on the interest rate differentials.
Learning Objectives
- Comprehend the mechanisms and implications of interest rate parity.