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theory of interest rate parity

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quated in terms of another currency is equal to the approximate difference in _______ prevailing in the two countries
a. interest rates
b. trade deficit rates
c. GNP growth rates

Solution Preview

Hi There,
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<br>The answer is A. Here's some extra info for you regarding Interest Rate Parity:
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<br>A theory that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.
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<br>Source: http://www.investopedia.com/terms/i/interestrateparity.asp
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<br>Interest ...

Solution Summary

This problem involves the fundamentals of the theory of interest rate parity

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