According to interest rate parity (IRP)
a. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
b. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
c. the forward rate differs from the spot rate by a sufficient amount to offset the inflation rate differential between two currencies.
d. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Question

01-10-2019
Business

contestada

According to interest rate parity (IRP)
a. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
b. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
c. the forward rate differs from the spot rate by a sufficient amount to offset the inflation rate differential between two currencies.
d. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.

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Answer:

The answer is: B) the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Explanation:

Interest rate parity (IRP) states that a strong relationship exists between interest rates and how the value of a currency moves.

The currency exchange rate is how much of a currency is needed to buy one unit of a different currency. There are two types of exchange rates:

spot rate: current exchange rate
forward rate: the rate at which a bank agrees to exchange one currency for another in the future

Also, different countries usually have different interest rates in their economies. For example, a US T-Bill may yield a 3% interest rate while a bond from the European Central Bank will only yield 1%.

The IRP refers to the fact that is doesn´t matter if you invest your money in your home country and then exchange it for a foreign currency, or you do it backwards and first exchange your money for a foreign currency and then invest it. Your earnings will remain the same since the exchange rate (spot and forward) and the interest rate are connected.