Assume That the Interest Rate in the Home Country of Currency

question 18

Multiple Choice

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

• A) should exhibit a discount.
• B) should exhibit a premium.
• C) should be zero (i.e., it should equal its spot rate).
• D) B or C

---

Definitions:

Perfectly Competitive

A market system where there are numerous buyers and sellers, unrestricted entry and departure, and a uniform product.

Sellers

Entities or individuals that make available goods or services for purchasing within the market.

Price Taker

An economic actor that accepts the prevailing market prices and lacks the power to influence those prices due to its small market share.

Natural Monopoly

A market condition where a single supplier is most efficient in serving the entire market's demand, often due to high barriers to entry like significant infrastructural costs.