If rf and rd are the interest rates of a foreign country and domestic country, respectively and if S_FD and S_FD are spot exchange rate and forward exchange rate between the countries F and D, the interest rate parity is indicated by

( 1 + r_f )( 1 + r_d ) = f_FDS_FD

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International Finance and Treasury

If r_f and r_d are the interest rates of a foreign country and domestic country, respectively and if $${S_{\frac{F}{D}}}$$ and $${S_{\frac{F}{D}}}$$ are spot exchange rate and forward exchange rate between the countries F and D, the interest rate parity is indicated by

A) $$\frac{{\left( {1 + {r_d}} \right)}}{{\left( {1 + {r_f}} \right)}} = \frac{{\frac{{{f_F}}}{D}}}{{\frac{{{S_F}}}{D}}}$$ B) $$\frac{{\left( {1 + {r_f}} \right)}}{{\left( {1 + {r_d}} \right)}} = \frac{{\frac{{{S_F}}}{D}}}{{\frac{{{f_F}}}{D}}}$$ C) $$\frac{{\left( {1 + {r_f}} \right)}}{{\left( {1 + {r_d}} \right)}} = \frac{{\frac{{{f_F}}}{D}}}{{\frac{{{S_F}}}{D}}}$$ D) None of these

Answer & Solution

Correct Answer: Option C

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If rf and rd are the interest rates of a foreign...

If rf and rd are the interest rates of a foreign country and domestic country, respectively and if $${S_{\frac{F}{D}}}$$ and $${S_{\frac{F}{D}}}$$ are spot exchange rate and forward exchange rate between the countries F and D, the interest rate parity is indicated by

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Related Questions on International Finance and Treasury

If r_f and r_d are the interest rates of a foreign country and domestic country, respectively and if $${S_{\frac{F}{D}}}$$ and $${S_{\frac{F}{D}}}$$ are spot exchange rate and forward exchange rate between the countries F and D, the interest rate parity is indicated by