Question

) Countries Mali and South Africa have their interest rates to be 16% and 12 %,...

) Countries Mali and South Africa have their interest rates to be 16% and 12 %, respectively. If their currencies trade according to 50 CFA francs buy one rand in the spot market, what will their future spot rate be in the aforementioned context? 2) Define IFE and explain the fact of how it occurs. Is there any deviation from it?

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Answer #1

1. Future spot rate= Spot rate (1+interest rate in Mali)/(1+interest rate in South Africa)

= 50(1.16)/(1.12)

= CFA Frans 51.78

2. International fisher effect will advocate that the difference in the future spot rate and current spot rate of two different currencies will be equal to interest rate differential in both the countries.

it is advocating that the disparity between exchange rate of two currencies will be equal to the disparity between the interest rate of those two countries.

In this case, the future price between these two currencies has been arrived after considering the interest rate differential and Hence, the international fisher theory has been properly followed and there is no deviation from it.

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