Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is...
Assume that the interest parity condition holds. Also assume that the one-year U.S. interest rate is 4% while the one-year U.K. interest rate is 6%. Given this information, financial markets expect the U.K. pound to:
A) depreciate by 2% today.
B) depreciate by 2% over the next year.
C) appreciate by 2% over the next year.
D) appreciate by 2% today.
E) be unchanged
Homework Answers
Solution: Depreciate by 2% over the next year
Explanation: When the interest parity holds and that the dollar is expected to depreciate against the pound, in that scenario U.K. interest rate exceeds the U.S. interest rate
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