Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot rate is 1.625 dollars per British pound. If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the interest rate parity theory?
a. No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate.
b. No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain.
c. Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain.
d. Cannot be determined without knowing the amount of money being exchanged.
A U.S. corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.
True
False
Most major countries in the world have agreed on fixed exchange rates in order to facilitate international trade.
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False
The forward exchange rate quoted today should be equal to the spot rate in the future.
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False