CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

According to covered interest rate parity,
A. A country with the higher (lower) interest rate will have its currency quoted at a premium (discount) in the forward market.
B. Interest rates across countries are equalized, after adjusting them for their currency premium or discount in the forward market.
C. Countries with higher interest rates offer arbitrage opportunities in the currency markets.
Explanation: The key word in covered interest rate parity is parity, which implies equality. Interest rates, after being adjusted for currency premiums and discounts in the forward market are equal across all countries. In other words, countries with higher interest rates have their currencies quoted at a discount over spot in the forward market.

User Contributed Comments 1

User Comment
eddeb A : higher interest rates -> forward trades at discount; Lower interest rates -> forward trades at premium.

Try it with real numbers in your the IRP formula.
You need to log in first to add your comment.