The interest rate parity condition implies that
1. the domestic interest rate will equal
the foreign interest rate plus a country-specific risk premium plus
the expected rate of depreciation of the domestic currency.
2. the domestic interest rate will equal
the foreign interest interest rate plus the expected rate of depreciation
of the domestic currency if there is no risk.
3. the domestic interest rate will equal the
foreign interest rate plus a foreign exchange risk premium plus the
expected rate of depreciation of the domestic currency.
4. none of the above.
Choose the correct option.