If Interest Rate Parity Exists and Transactions Costs Are Zero

question 3

Multiple Choice

If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

• A) less than the domestic interest rate.
• B) greater than the domestic interest rate.
• C) equal to the domestic interest rate.
• D) greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

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Definitions:

LRAC Curve

Stands for Long-Run Average Cost curve, which shows the lowest average cost at which a firm can produce any given level of output in the long term when all inputs are variable.

Decreasing-Cost Industry

An industry in which production costs decrease as the industry grows and output increases, often due to economies of scale.

LRAC Curve

The Long-Run Average Cost curve, showing the lowest possible cost of producing different levels of output when all inputs are variable.

Increasing-Cost Industry

An industry where production costs increase as output grows, often due to resource limitations or regulatory constraints.