Q. Interest Rate Parity (IRP) implies that:
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(A)
Interest rates should change by an equal amount but in the opposite direction to the difference in inflation rates between two countries
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(B)
The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency
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(C)
The interest rates between two countries start in equilibrium, any change in the differential rate of inflation between the two countries tends to be offset over the longterm by an equal but opposite change in the spot exchange rate
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(D)
In the long run real interest rate between two countries will be equal
✅ Correct Answer: (B)
The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency