The Interest Rate Parity Theorem Should Work Because, When One

question 589

Multiple Choice

The Interest Rate Parity Theorem should work because, when one sells a low interest rate currency to invest in a high interest rate currency and hedges the currency risk:

• A) The cost of hedging is given by the forward points, which are equal to the interest rate differential between the two currencies
• B) The high interest rate currency will depreciate
• C) The profit from the appreciation of the high interest rate currency has been hedged away
• D) Interest rates are mean reverting, which means the low interest rate will tend to rise and the high interest rate will tend to fall

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Definitions:

Aversive Conditioning

A method of behavior modification that involves using unpleasant stimuli to discourage undesirable behaviors.

Negative Transference

A psychological phenomenon where an individual projects feelings of negativity or hostility from past relationships onto a new person, often a therapist.

Behavioral Contracting

A therapy technique involving a written agreement between a therapist and a client outlining behavior change expectations and rewards.

Desensitization

The diminished emotional responsiveness to a negative, aversive or positive stimulus after repeated exposure to it.