Maintain interest rate parity

Question 1) Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward _______ will _______ in order to maintain interest rate parity.

  • discount; increase
  • discount; decrease
  • premium; increase
  • premium; decrease

Question 2) U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies were probably less affected by the Asian crisis than MNCs invoicing in Asian currencies but not incurring expenses in those currencies.

  • true.
  • false.

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Finance Basics: Maintain interest rate parity
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