Question

If interest rate parity holds between the US and a foreign country, transaction costs are zero, and the forward rate is an unbiased predictor of future spot rate, then the effective financing rate for a U.S company that borrows the foreign currency on a covered basis would be: Group of answer choices More than the foreign interest rate. Less than the foreign interest rate. Equal to the U.S. interest rate. Less than the U.S. interest rate. Equal to the foreign interest rate.

Answer 1

Answer:

E) Equal to the foreign interest rate

Explanation:

In the case when the US company borrowed the foreign currency so here the interest rate is applied and considered to be the foreign interest rate. When it is borrowed on a covered basis, the foreign currency risk should be hedged and the interest rate should be equivalent to the foreign country

Therefore the last option is correct