- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 6. Currency Forward and Futures Contracts
CFA Practice Question
Which of the following statements is not true?
A. According to the interest rate parity theory, the return on a hedged foreign investment will not equal the domestic interest rate on investments of identical risk.
B. According to the 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. In an efficient market with no transaction costs, the interest differential should be about equal to the forward differential.
C. If the covered interest differential between two money markets is non zero, there is an arbitrage incentive to move money from one market to the other.
Explanation: Interest parity ensures that the return on a hedged foreign investment will equal the domestic interest rate on investments of identical risk.
User Contributed Comments 2
| User | Comment |
|---|---|
| carlos2 | What about B???? |
| americade | B: In percentage terms it's true |