Question

interest rate parity defines the relationships among which of the following? (see 18.4) group of answer choices real and nominal interest rates across countries spot exchange rates, forward exchange rates, nominal interest rates, and real interest rates real interest and inflation rates forward exchange rates, relative interest rates, and spot exchange rates spot exchange rates, future exchange rates, interest rates, and inflation rates

Answer 1

The interest rate parity (IRP) theory explains the connection between a currency's spot exchange rate and its expected spot rate or forward currency value.

What if the IRP does not hold?

- Covered interest arbitrage would then be possible.

- Arbitrage is the opportunity to raise an excess return while supposing no risk. - The concept "covered" is used because the future exchange rate is secured through the use of a forward contract.

Forward Rate as Unbiased Predictor - the expected mean discrepancies are zero - the forward rate will constantly overestimate and underestimate the actual future spot rate.

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