Economics · Forex and Money Market
Market dynamics are often influenced by the arbitrage opportunities between the spot market and the derivatives market. Based on Interest Rate Parity, which of the following statements accurately reflects the impact of a surplus liquidity condition in the domestic money market on the Forward Premia in the Forex market?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
Share:
- 1Surplus liquidity has no impact on the forex market because the money market and forex market are separated by a Chinese Wall policy mandated by SEBI.
- 2A liquidity surplus leads to an increase in the cash reserve ratio which automatically doubles the forward premium to protect domestic exporters.
- 3High liquidity in the money market causes the Reserve Bank of India to mandatorily fix the forward rate at a constant value to prevent currency speculation.
- 4Surplus liquidity in the money market leads to a drop in call money rates, which usually results in a narrowing of the forward premia as the cost of carry decreases.✓
Correct answer
Surplus liquidity in the money market leads to a drop in call money rates, which usually results in a narrowing of the forward premia as the cost of carry decreases.
Download Single Question PDF
Save this question and verified answer as a clean study sheet with live clickable link.
👥
Share with Friends & Study Groups
Challenge your peer aspirants on WhatsApp or Telegram to solve this question!
Online Test Series
Start Free Mock Test →Preparing for Economics?
Practice full-length mock tests with real exam timers, instant score analysis, and all-India ranking.
Chapter Practice
Practice Forex and Money Market MCQs →Want more practice questions on Forex and Money Market?
Solve complete topic-wise tests with detailed solutions on GkGet.
Related Practice Questions
Recommended practice questions in Economics · Forex and Money Market