If Interest Rate Parity Exists, the Attempt to Finance with a Foreign

question 16

Multiple Choice

If interest rate parity exists, the attempt to finance with a foreign currency while covering the position to avoid exchange rate risk will result in an effective financing rate that is ____ the domestic interest rate.

• A) lower than
• B) greater than
• C) similar to
• D) None of these are correct.

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Definitions:

Trade Surplus

An excess of exports over imports.

Net Capital Outflow

The difference between a nation's total exports of physical assets and its total imports of physical assets within a given period.

Domestic Assets

Assets located within a country's borders, including both tangible and intangible assets owned by residents or entities, and contributing to the national economic value.

Trade Surplus

A situation where a country's exports exceed its imports over a given period, indicating a net inflow of domestic currency from foreign markets.