The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8932 0.9133 Which of the following statements is implied by interest rate parity theory? A product bought in one country should have the same price in other countries, adjusted for exchange rate. If two countries have the same inflation rate, they should have the same interest rate, too. An investment in one’s home country should have the same return as a similar investment in a foreign country. Interest rates in all countries with the same political risk should be the same.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk.

The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:

Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):

	Spot Exchange Rate	One-Year Forward
Exchange Rate
Canadian dollar (U.S. dollar/Canadian dollar)	0.8932	0.9133

Which of the following statements is implied by interest rate parity theory?

A product bought in one country should have the same price in other countries, adjusted for exchange rate.

If two countries have the same inflation rate, they should have the same interest rate, too.

An investment in one’s home country should have the same return as a similar investment in a foreign country.

Interest rates in all countries with the same political risk should be the same.

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