Assume That the Interest Parity Condition Holds and That Both

question 27

Multiple Choice

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause

• A)a reduction in the exchange rate expected in the future.
• B)a reduction in the current exchange rate.
• C)greater depreciation of the domestic currency expected in the future.
• D)all of the above
• E) none of the above

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Definitions:

Spot Rates

The current market price at which a particular asset can be bought or sold for immediate delivery.

Hedged Date

The date on which a hedge transaction is initiated to protect against future fluctuations in value.

Foreign Exchange Hedge

A financial transaction implemented to protect an investment or business operation from adverse movements in exchange rates.

Foreign Currency Futures

Financial contracts to exchange currencies on a specified future date at a predetermined price.