Assume That Interest Rate Parity Holds, and the Euro's Interest

question 17

Multiple Choice

Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

• A) discount; increase
• B) discount; decrease
• C) premium; increase
• D) premium; decrease

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