​If Interest Rate Parity Does Not Hold and the Forward

question 39

Multiple Choice

​If interest rate parity does not hold and the forward premium exceeds the interest rate differential, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

• A) ​lower than the domestic interest rate.
• B) ​higher than the domestic interest rate.
• C) ​similar to the domestic interest rate.
• D) ​highly variable.

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