|Author||Topic: interest rate and exchange rate|
|Could anyone help me?
I'm confused by the relationship between interest rate(IR) and exchange rate(ER).As we know, an increase in IR will result in capital inflow and then an appreciation in the home currency; however, the intertest rate parity theory says that an increase in IR will result a forward discount in the ER. Could anyone help me explain it?
|The first talks about the exchange rate generally while the second talks about the relation between 2 concrete currencies. The IR increase would appreciate the currencys, however if the IR in one currency have increased greater than in the other one, while both would appreciate towards the third currency (your first statement), the forward discount between the two would decrease (your second statement).|
CFA Discussion Topic: interest rate and exchange rate
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