question archive Based on interest rate parity, the larger the degree by which the U
Based on interest rate parity, the larger the degree by which the U
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Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the: smaller will be the forward premium of the foreign currency. smaller will be the forward discount of the foreign currency. larger will be the forward premium of the foreign currency. larger will be the forward discount of the foreign currency.
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Based on interest rate parity, the larger the degree, by which the U.S. interest rate exceeds the foreign interest rate, the larger will be the forward premium of the foreign currency.
Therefore, correct answer is option: the larger will be the forward premium of the foreign currency
The interest rate parity holds; there is a relationship in spot exchange rate, forward exchange rate and nominal exchange rates of two countries.
Interest rate parity equation -
(Forward Exchange rate / Spot exchange rate) = [1+ Rf(US)]/[1+Rf(foreign)]
Where,
Forward Exchange rate
Spot exchange rate
Risk-free interest rate in foreign country
