Assume That Interest Rate Parity Exists, and There Are Zero

question 14

Multiple Choice

Assume that interest rate parity exists, and there are zero transactions costs. If the forward rate consistently underestimates the future spot rate, then:

• A) on average, the foreign effective financing rate is greater than the domestic interest rate.
• B) on average, the foreign effective financing rate is less than the domestic rate.
• C) the foreign effective financing rate exceeds the U.S. interest rate when its forward rate exhibits a discount and is less than the U.S. interest rate when its forward rate exhibits a premium.
• D) the foreign effective financing rate is less than the U.S. interest rate when its forward rate exhibits a discount and exceeds the U.S. interest rate when its forward rate exhibits a discount.

---

Definitions:

Injection Drug Use

The administration of drugs into the body with a needle and syringe, often associated with higher risk of infectious diseases.

HIV Infection

A viral infection caused by the human immunodeficiency virus, which attacks the immune system and can lead to acquired immunodeficiency syndrome (AIDS).

African Americans

A group in the United States characterized by their descent from any of the African continent's black racial groups.

Hispanic Americans

Individuals in the United States who are descendants or immigrants from Spanish-speaking countries in Latin America and the Caribbean.