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Interest Rate Parity (IRP) links spot and forward exchange rates with:
AInflation differentials between two currencies
BInterest rate differentials between two currencies
CGDP growth differentials of two economies
DProductivity differentials of the two economies
Answer & Solution
Correct answer: B. Interest rate differentials between two currencies
1. Identify what the question asks: this concept maps to irp (§8.1).
2. Apply the framework or formula relevant to the topic.
3. Eliminate distractors and arrive at the correct option (B).
_Source: ICAI BoS CA Final Paper 2, Ch 10 "Foreign Exchange Exposure and Risk Management"_
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