If Interest Rate Parity Holds, Then the One-Year Forward Rate

question 18

Multiple Choice

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

• A) greater than
• B) less than
• C) equal to
• D) The answer is dependent on whether the forward rate has a discount or premium.

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Definitions:

Cold War

A period of geopolitical tension between the Soviet Union and the United States and their respective allies from the late 1940s to the early 1990s, characterized by rivalry, propaganda, and proxy wars.

North Atlantic Treaty Organization

An intergovernmental military alliance between North American and European countries, established in 1949 to provide collective security against aggression.

Ground Zero

Originally denoting the point on the earth's surface directly above or below an exploding nuclear bomb, now commonly used to refer to the site of the September 11, 2001 terrorist attacks on the World Trade Center in New York City.

Nuclear Explosion

A powerful detonation resulting from the release of energy following the fission or fusion of atomic nuclei, used in military weaponry and, experimentally, for peaceful purposes.