Can someone please explain to me why it is answer C? I thought if interest rates are high, it attracts investment and more demand for domestic currency which should make the DC appreciate. Thanks!
please post the question for people that dont have the books in front of them (like me)
Sadly, I know the answer without the question. If interest rates rise in the DC, this causes the currency to depreciate in the forward market because of covered interest arbitrage. Similarly, the forward price of a currency is affected only by two interest rates and the tenor of the contract and has nothing to do with whether or not investment will increase.
Question is - The interest rate in Country A is greater than the interest rate in Country B. Question asks whether Country A’s currency is expected to depreciate or appreciate relative to the B, and if it should trade with a forward discount or premium. Thanks Joey for your explanation!