Assume That Interest Rate Parity Exists, and There Are Zero

question 27

Multiple Choice

Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:

• A) on average, the foreign effective financing rate is greater than the domestic interest rate.
• B) on average, the foreign effective financing rate is less than the domestic rate.
• C) the foreign effective financing rate exceeds the domestic interest rate when its forward rate exhibits a discount and is less than the domestic interest rate when its forward rate exhibits a premium.
• D) the foreign effective financing rate is less than the domestic interest rate when its forward rate exhibits a discount and exceeds the domestic interest rate when its forward rate exhibits a discount.

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Definitions:

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A system of intermediaries or channels through which goods and services pass from the manufacturer to the end consumer.

Service-Sponsored Retail Franchise System

A franchising model where franchisors provide a full range of services including brand, operational guidelines, and ongoing support to the franchisee, often seen in retail.

Customer-Generated Franchising System

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Agent-Sponsored Wholesale Franchise System

A franchising model combining agent wholesaling and franchising to expand distribution and reach of products.