​If Interest Rate Parity Exists and the Forward Rate Is

question 7

Multiple Choice

​If interest rate parity exists and the forward rate is expected to overestimate the future spot rate, then uncovered foreign financing is expected to result in an effective financing rate that will be:

• A) ​similar to the U.S. financing rate.
• B) ​lower than the U.S. financing rate.
• C) ​higher than the U.S. financing rate.
• D) ​lower than the U.S. interest rate if the forward rate exhibits a discount and higher than the U.S. interest rate if the forward rate exhibits a premium.

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Definitions:

Fixed Cost

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold.

Hard Rationing

A situation where capital is not available to a company under any circumstances, often due to economic conditions or poor company performance.

Soft Rationing

A situation where a company limits the amount of funding or capital it allocates to new or ongoing projects, often due to internal policy decisions.

Financial Stop-loss

A risk management strategy used to limit or reduce losses in various financial transactions, typically by setting a predetermined exit point for an investment.