Assume that interest rate parity holds, and the euros interest rate is 13% while the US...
Assume that interest rate parity holds, and the euros interest rate is 13% while the US interest rate is 12%. Then the euros interest rate increases to 14% while the US remains the same. As a result of the increase in interest rate on euros, the euros forward _____ will ____ in order to maintain interest rate parity.
a. discount; increase
b. discount; decrease
c. premium; increase
d. premium; decrease
Homework Answers
As a result of the increase in the interest rate on euros, the euros forward discount will increase in order to maintain interest rate parity.
The answer is a.
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