- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics
- Reading 10. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 2. Foreign Exchange Forward Markets

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**CFA Practice Question**

Which is the following statement is NOT true?

A. If the covered interest differential between two money markets is nonzero, there is an arbitrage incentive to move money from one market to the other.

B. According to the covered interest rate parity theory, the return on a hedged foreign investment will not equal the domestic interest rate on investments of identical risk.

C. According to the covered interest rate parity theory, the currency of the country with a lower interest rate should be at a forward premium in terms of the currency of the country with the higher rate.

**Explanation:**Covered interest parity ensures that the return on a hedged foreign investment will equal the domestic interest rate on investments of identical risk.

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**User Contributed Comments**
2

User |
Comment |
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carlos2 |
What about B???? |

americade |
B: In percentage terms it's true |