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If the spread between the spot and forward exchange rates of two currencies equals the interest rate difference between the two countries, this phenomenon is referred to as____

a) purchasing-power equality
b) commodity arbitrage
c) currency hedging
d) interest-rate parity

User Zaz
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Final answer:

The phenomenon described in the question is referred to as interest-rate parity.

Step-by-step explanation:

The phenomenon described in the question, where the spread between the spot and forward exchange rates equals the interest rate difference between two countries, is referred to as interest-rate parity. This concept is used in international finance to explain the relationship between exchange rates and interest rates.

Interest-rate parity suggests that if there is a higher interest rate in one country compared to another, there would be a corresponding appreciation in the currency of the country with higher interest rates to compensate for the difference and equalize the returns for investors.

For example, if the interest rate in Country A is 5% and the interest rate in Country B is 3%, interest-rate parity would suggest that the currency of Country A would appreciate to offset the interest rate differential.

User Rolele
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