Economy question - currency

If the domestic currency is trading at a forward premium, then relative to the interest rate of the domestic country, the interest rate in the foreign country is most likely:


the same.


The correct answer is 1. Why it is higher ?

Interest rate parity:

F(f/d) = S(f/d)*(1 + rf)/(1 + rd)

If the forward rate, F, is higher than the spot rate, S, then the foreign risk-free rate, rf, has to be higher than the domestic risk-free rate, rd.