contestada

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.

Respuesta :

As a result of the increase in the interest rate on euros, the euro's forward PREMIUM will DECREASE in order to maintain interest rate parity.

The rate at which a bank or other financial institution agrees to swap one currency for another at a certain future date is known as the forward exchange rate. The circumstance where the forward exchange rate is greater than the actual exchange rate is represented by the forward premium.

Since the interest rate on the euro will rise by 2% in this situation, the premium will likewise decline (along with future expected value), keeping the interest rate parity constant.

What is interest parity rate?

According to the Interest Rate Parity theory, the difference between two currencies' spot and future exchange rates is equivalent to the difference between their respective interest rates.

What is spot exchange rate?

The spot exchange rate is the rate at which two currencies are being traded at the moment on the forex market. You can get this exchange rate from financial institutions like banks.

Learn more about Forward rate at https://brainly.com/question/15172825

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