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Question $39$

UMB is considering in launching a new Absolute Currency Return Fund. In order to establish a currency hedging strategy, Caleb gathers the following information about foreign exchange rates, spot rate, forward rate, inflation and interest rates.

Exhibit $5$

USD$/$GBP

$1\mathrm{.}6500$

CHF$/$USD

$1\mathrm{.}8460$

Spot rate: USD$/$GBP

$1\mathrm{.}8328$

$90-$day forward rate USD$/$GBP

$1\mathrm{.}8432$

CAD$/$USD spot rate

$1\mathrm{.}18$

Expected U$.$S$.$ inflation

$4\%$

Expected Canadian inflation

$2\%$

U$.$S$.$ Interest rate

$8\%$

Canadian Interest rate

$5\%$

Factor $1$: Currency appreciation$/$depreciation over time should just offset differences in interest rates.

The specific concept is related in factor $1$ is most accurately describes the:

A$.$

International Fisher relation.

B$.$

Interest rate parity relation.

C$.$

Purchasing power parity relation