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      Question

      __________ is a theory according to which the interest

      rate differential between two countries is equal to the differential between the forward exchange rate and spot exchange rate.
      A Interest rate Swap theory Correct Answer Incorrect Answer
      B Differential Interest Rate theory Correct Answer Incorrect Answer
      C Interest rate Parity Correct Answer Incorrect Answer
      D Foreign exchange rate Correct Answer Incorrect Answer
      E None of the above Correct Answer Incorrect Answer

      Solution

      The interest rate parity (IRP) is a theory regarding the relationship between the spot exchange rate and the expected spot rate or forward exchange rate of two currencies, based on interest rates. The theory holds that the forward exchange rate should be equal to the spot currency exchange rate times the interest rate of the home country, divided by the interest rate of the foreign country.

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