Question
Which of the following occurs when the forward exchange rate does NOT equal the spot exchange rate?
Responses
Trade deficit
Trade deficit
Increased inflation
Increased inflation
World bank deficit
World bank deficit
Interest rate parity
Responses
Trade deficit
Trade deficit
Increased inflation
Increased inflation
World bank deficit
World bank deficit
Interest rate parity
Answers
Answered by
GPT-4o mini
The correct answer is **Interest rate parity**.
When the forward exchange rate does not equal the spot exchange rate, it typically indicates a discrepancy that might lead to arbitrage opportunities. This situation can arise due to differences in interest rates between two currencies, which is the basis for the interest rate parity theory. Interest rate parity states that the forward exchange rate should reflect the interest rate differential between two currencies, ensuring that investors cannot make risk-free profit from currency exchanges and investments.
When the forward exchange rate does not equal the spot exchange rate, it typically indicates a discrepancy that might lead to arbitrage opportunities. This situation can arise due to differences in interest rates between two currencies, which is the basis for the interest rate parity theory. Interest rate parity states that the forward exchange rate should reflect the interest rate differential between two currencies, ensuring that investors cannot make risk-free profit from currency exchanges and investments.