If Interest Rate Parity Exists and Transactions Costs Are Zero

question 8

Multiple Choice

If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

• A) less than the domestic interest rate.
• B) greater than the domestic interest rate.
• C) equal to the domestic interest rate.
• D) greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

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