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Answer: Dividend yield of the underlying asset
In the cost of carry framework, holding the underlying can generate a benefit analogous to income. For a foreign currency, that benefit is the **foreign interest rate** earned on the foreign currency balance. This is most similar to the **dividend yield** on an investment asset, because both reduce the net cost of carrying the asset forward. Therefore, the foreign risk-free interest rate is analogous to the **dividend yield of the underlying asset**.
Author: Manit Arora
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Question-166.4. Interest rate parity (IRP) can be viewed as an application of the cost of carry (COC) model where the underlying investment commodity is the foreign currency and the foreign risk-free interest rate is analogous to which COC factor? (Best answer)
A
Storage cost
B
Dividend yield of the underlying asset
C
Convenience yield of the underlying asset
D
The spot price
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