Ask Question
29 December, 22:21

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U. S. interest rate. According to interest rate parity, the forward rate of Currency X:a. should exhibit a discount.

b. should exhibit a premium.

c. should be zero (i. e., it should equal its spot rate).

+5
Answers (2)
  1. 30 December, 00:09
    0
    According to interest rate parity, the forward rate of Currency X should exhibit a discount

    Explanation:

    Interest rate parity is when the difference between interest rates between two countries is equal to the difference in the spot and forward exchange rates.

    Considering country X with currency X.

    If currency X has an higher interest rate than US, currency X is expected to exhibit a discount (i. e. a rate used for discounting bills of exchange) in order to balance up with the exchange rate of US by realigning the relationship between the interest rate differential of X and the forward premium (or discount) on the forward exchange rate between the X and USD.

    interest rate parity assumes that any currency with lower interest rate will trade at a forward premium compared to a currency with higher interest rate
  2. 30 December, 00:56
    0
    A - forward rate of currency X should exhibit a discount

    Explanation:

    the interest rate parity states that the interest rate differential between 2 countries is equal to the differential between the forward exchange rate and the spot exchange rate (Hayes, 2019). The theory assumes that a currency with lower interest rates will trade at a forward premium in relation to a currency with a higher interest rate (Hayes, 2019). The opposite is true for Currency X and the US Dollar - since currency X is higher than the US interest rate, its forward rate will be a discount. This makes A the correct answer.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U. S. interest rate. According to ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers