Answer (D) is correct . The interest-rate parity theorem explains the effect on exchange rates of inflation reflected in nominal interest rates. The ratio of the current forward and spot exchange rates (expressed in units of foreign currency per dollar) equals the ratio of one plus the current nominal foreign rate to one plus the current nominal domestic rate. If the current nominal foreign interest rate increases, the forward rate in units of the foreign currency per dollar will increase. Thus, the foreign currency will trade at a discount in the forward market.
Answer (A) is incorrect because Nominal interest rates increase when inflation rates are expected to increase.
Answer (B) is incorrect because The interest-rate parity theorem shows the effect on exchange rates of inflation reflected in nominal interest rates.
Answer (C) is incorrect because A rise in the real interest rate will lead to an appreciation of the currency and is not part of the interest-rate parity theorem.
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