If interest rate parity exists, and the forward rate is an accurate estimator of

Question

If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. greater than similar to none of the options listed lower than need additional information
If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. greater than similar to none of the options listed lower than need additional information
If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. greater than similar to none of the options listed lower than need additional information
If interest rate parity exists, and the forward rate is an accurate estimator of the future spot rate, the foreign financing rate will be ____ the home financing rate. greater than similar to none of the options listed lower than need additional information

Explanation / Answer

Interest rate parity refers to the interest rate differential between two countries is equal to the differential between forward exchange rate and spot exchange rate. Hence if there is interest rate parity and forward rate is accurate estimator of the spot exchange, the foreign financing rate will be similar to the home financing rate.

The correct option is 2nd.

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