Sorry. This should be a post for level forum. But I am hoping some experts in general forum can help me to understand this. According to CFAI sample exam, forward premium will cause currency to appreciate. But see my comment below, then base on the interest parity it will appreciate forever? Here is the question: in a foreign exchange market characterized by interest rate parity, if the domestic country has a lower risk-free-rate than the foreign country, the currency of the domestic country is most likely to be trading at a forward: a) discount and to appreciate b) discount and to depreciate c) premium and to appreciate d) premium and to depreciate Answer is C from CFAI But the thing is : F/S = (1+rd)/ (1+ rf), if S decreases i.e DC appreciates, then F will decreases to make parity to hold, so it will continue to appreciate forever as long as interest rates stay the same. Also clearly, if a country lowers its interest rate, its currency will depreciate. Now because of interest parity, it will appreicate forever. It just does not make sense. I think U.S. should drop interest to zero, so U.S. dollar will appreciate forever due to interest parity.
If you sell the domestic currency and buy the foreign currency you’ll get more interest. This would be a risk-free trade if you could hedge that sale so you effectively could get every penny of your money back in the future. Since the market doesn’t give out free lunches, the market won’t let you hedge it at the same price you paid for the foreign currency.
“I think U.S. should drop interest to zero, so U.S. dollar will appreciate forever due to interest parity.” May God have mercy on your soul.