What does interest-rate parity say about international borrowing costs?

Expert Solution

Interest rate parity will be advocating that interest rate differential between the two countries will be equal to the difference between their exchange rate so there will be no arbitrage possible and the international borrowing cost will always be remaining similar if we are discounting it in the terms of exchange rate because even if the rate of interest are lower in other countries, when we will be discounting it in terms of difference between the forward rate and spot rates of these currencies, we will not be gaining any advantage so it is a no-arbitrage kind of situation and it is better to to borrow from domestic market because International borrowing will not be having any cost advantage associated with it.

Hence, interest rate parity will not be promoting International borrowing because there will be no benefit available for international borrowing as interest rate differential will be equal to the exchange rate differential, so the borrowing cost will remain similar all across the world.

jeff jeffy answered 2 years ago

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