Skip to content

CA Final · Advanced Financial Management · International Financial Management

Which statement correctly describes covered interest rate parity?

Covered interest rate parity holds when the forward premium or discount exactly offsets the interest rate differential between two currencies. Then covered investment returns are equal in both countries and no riskless arbitrage profit is available. It differs from PPP, which relates to prices and inflation.

  1. AThe forward premium or discount offsets the interest differential, leaving no riskless arbitrageCorrect
  2. BThe forward rate equals the expected future spot rate always
  3. CSpot rates adjust to equalise the price of identical goods across countries
  4. DThe currency with lower inflation depreciates

Explanation

Covered interest parity states that the forward discount or premium equals the interest differential, so covered investments yield the same return in either currency. The second option describes the unbiased forward rate hypothesis, and the third is absolute PPP.

Did you get it right without looking?

One question tells you little. A timed set on International Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise International Financial ManagementFree diagnostic mock

More International Financial Management questions