Interest rate parity suggests that a country with lower interest rates should have a currency that...
Interest rate parity suggests that a country with lower interest rates should have a currency that trades at a forward premium relative to the currency with higher interest rates. True or false?
Homework Answers
Answer: TRUE
Explanation:
Per the IRPT, the forward rate between two currencies, S1 = S0*(1+rh)/(1+rf), where S0 = the current exchange rate, S1 the future rate, rh = interest rate at home and rf = interest rate at the foreign country. So when rh is lower the foreign currency will be quoted lower in terms of teh domestic currency. That is the foreign currency will be at discount and the domestic currency will be at premium.
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