Mathematically, Interest Rate Parity Between the Currencies of Two Countries

question 55

Multiple Choice

Mathematically, interest rate parity between the currencies of two countries, A and B, can be expressed as $$\mathrm { I } \left( 1 + \mathrm { i } _ { \mathrm { A } } \right) = \left( \frac { 1 } { \mathrm {~S} } \right) ( 1 + \mathrm { i } \mathrm { B } ) \mathrm { F }$$
where ________.

• A) I = amount of A's currency to be invested for a time period of length t
• B) F = spot exchange rate: price of foreign currency in terms of domestic currency (units of domestic currency per unit of foreign currency)
• C) S = t-period forward rate: price of foreign currency t periods from now
• D) iB = interest rate on an investment maturing at time t in country A

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