If rF and rD are the interest rates of a foreign country and domestic country, respectively, and if…
Under the Interest Rate Parity (IRP) theorem, the ratio of the forward exchange rate (f_F/D, expressed in units of foreign currency F per unit of domestic currency D) to the…
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If rF and rD are the interest rates of a foreign country and domestic country, respectively, and if SF/D and fF/D are spot exchange rate and forward exchange rate between the countries F and D, the interest rate parity is indicated by :
Answer and explanation
Correct answer C
Under the Interest Rate Parity (IRP) theorem, the ratio of the forward exchange rate (f_F/D, expressed in units of foreign currency F per unit of domestic currency D) to the spot exchange rate (S_F/D) equals the ratio of their gross interest factors: f_F/D / S_F/D = (1 + rF) / (1 + rD).
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