The Principle of Interest Rate Parity Asserts That The

question 67

Multiple Choice

The principle of interest rate parity asserts that the:

• A) relative spot exchange rates determine the relativity between the forward exchange rates and spot rates.
• B) relativity between spot and forward exchange rates reflects the interest rate differentials between countries.
• C) relative forward exchange rates determine the relativity between the spot exchange rates and the forward interest rate.
• D) relative forward exchange rates determine the relativity between the forward exchange rates and forward interest rates.

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Definitions:

Inflation

The rate at which the general level of prices for goods and services is rising and, subsequently, purchasing power is falling.

Interest Rates

The rate at which a lender charges a borrower for asset usage, calculated as a percentage of the principal sum.

Market Value

The current price at which an asset or service can be bought or sold in a marketplace.

Financial Asset

Assets that derive value from a contractual claim, such as stocks, bonds, bank deposits, and other investments.