Assume That Interest Rate Parity Holds

question 7

Multiple Choice

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.

• A) discount; 2.73
• B) premium; 2.73
• C) discount; 3.65
• D) premium; 3.65

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Definitions:

Variable Cost

Expenses that vary directly with the production output, including costs of raw materials and direct labor.

Selling Price

The amount of money for which a product or service is sold to customers.

Contribution Margin Ratio

A financial metric that measures how effectively a company can cover its variable costs with revenue, calculated as contribution margin divided by sales revenue.

Variable Cost Per Unit

The cost that changes in proportion to changes in the level of output or activity.