Assume That Interest Rate Parity Holds

question 37

Multiple Choice

Assume that interest rate parity holds. The U.S. one-year interest rate is 10% and the Australian one-year interest rate is 8%. What will the approximate effective yield be for an Australian citizen of a one-year deposit denominated in U.S. dollars? Assume the deposit is covered by a forward sale of dollars.

• A) 10%.
• B) 8%.
• C) 2%.
• D) cannot answer without more information

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Definitions:

Sales

The act of trading a good for cash; the process of making a sale.

Marginal Costs

The rise in the overall expense incurred from the production of an extra unit of a good or service.

Potential Customers

Individuals or organizations that could become purchasers of a product or service, but have not yet done so.

Expected Profit

The forecasted amount of profit based on potential outcomes and their probabilities.