Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply.

A) When interest rates decrease in a country, its currencys value tends to decrease because domestic investors convert their home currency into other currencies to invest in these higher yielding securities.

B) If a government intends to let its currencys value fall relative to other currencies, it will sell its currency from reserves in the market.

C) If a country experiences greater inflation than its trading partners, the value of its currency decreases over time relative to the value of its partners currencies.

D) If the demand for a currency increases, the currencys value will decrease relative to other currencies.

Spot Exchange Rate	One-Year Forward
	Exchange Rate
Canadian dollar (U.S. dollar/Canadian dollar)	0.8798	0.8935

The current one-year interest rate on U.S. Treasury securities is 6.35%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk?

A) 5.19%

B) 3.78%

c) 4.25%

D) 4.72%

Because the investor can earn a riskless positive return by taking advantage of the interest rates and the spot and forward currency values between two countries, the transaction will be called ____(Uncovered or covered)____ interest arbitrage. This kind of arbitrage will not last long, and the spot and forward rates will be forced into equilibrium.

Which of the following statements is implied by interest rate parity theory?

A) An investment in ones home country should have the same return as a similar investment in a foreign country.

B) If two countries have the same inflation rate, they should have the same interest rate, too.

C) A product bought in one country should have the same price in other countries, adjusted for exchange rate.

D) Interest rates in all countries should be the same.