As the Expected Future Spot Rate Moves Closer to the Spot

question 85

Multiple Choice

As the expected future spot rate moves closer to the spot rate, uncovered interest parity indicates that:

• A) interest rates should remain constant.
• B) interest rates should converge.
• C) interest rates should diverge.
• D) The answer depends on whether the expected future spot rate is higher or lower than the spot rate.

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Definitions:

Discount Rate

The interest rate used to discount future cash flows of a financial instrument to present value.

Lease Payments

Regular payments made for the use of an asset or property under a lease agreement.

Incremental Sales

The additional sales generated by a new marketing campaign, product launch, or any other business activity, over and above existing sales.

Cash Operating Expenses

Expenses directly related to the daily operational activities of a business, such as salaries, rent, and utilities, that require immediate cash payment.