1. Which of the following statements is/are correct? [I] Interest rate parity exists when the interest rate differential between two countries is exactly equal to the forward discount or premium on the two countries' currencies [II] When interest rate parity exists, interest rate differential between countries will be offset by the cost of covering currency risk in the forward market. [III] When interest rate parity holds, currency markets are in equilibrium, and capital funds will not flow since no profit is earned on international investments.

I and II

II and III

I and III

I, II, III

Only III