Question

If interest rate parity holds, what would happen to the forward rates when the foreign currency...

If interest rate parity holds, what would happen to the forward rates when the foreign currency money market offers a higher return than the domestic money market? What would happen if the adjustment does not take place? Explain your answer

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

If interest rate parity holds, then because foreign currency is offering a higher return, that currency would depreciate relative to the domestic curreny or the domestic currency will appreciate. Hence, if we are writing the exchange rate in the form of foreign per domestic currency, it would increase.

If the adjustment in the exchange rate does not take place, there will be an arbitrage opportunity for traders and they would continuously buy the forwards and sell the spot as they would know that the right rate should be higher than what it is now.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose the interest parity condition holds and that the domestic interest rate is greater than the...
Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Explain.
what does the nominal interest rate parity state? Would the condition be violated if nominal interest...
what does the nominal interest rate parity state? Would the condition be violated if nominal interest rates in the domestic and foreign country were different on two securities that were identical in all aspects? A currency premium would lead to a modification of the nominal interest rate parity condition. Why?(essay)
1. When the U.S. dollar depreciates relative to other major currencies, what would happen to exports...
1. When the U.S. dollar depreciates relative to other major currencies, what would happen to exports and imports of goods and services from and to the United States? Is it good for domestic firms exporting goods and services? Is it good for domestic portfolio investors who may purchase foreign assets? 2. When the Federal Reserve conducts an expansionary monetary policy (increasing its monetary base), what would happen to the domestic money supply? Does this also affect the supply of dollar...
According to the uncovered interest parity (UIP) theory, domestic currency appreciates when domestic monetary policy tightens...
According to the uncovered interest parity (UIP) theory, domestic currency appreciates when domestic monetary policy tightens because: A) The higher domestic yield makes domestic currency more attractive in terms of expected return B) The lower domestic yield makes domestic currency more attractive in terms of expected return C) The appreciation in the domestic currency in the spot market increases the expected appreciation of the domestic currency D) The appreciation in the domestic currency in the spot market decreases the expected...
Exchange rates can be quoted as foreign currency per unit of domestic currency or domestic currency...
Exchange rates can be quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency. Unless otherwise stated, we adopt the convention that is given in your textbook, that is, we define exchange rates as domestic currency per unit of foreign currency. Using the dollar and euro as a currency pair, the bilateral exchange rate is E$/€, expressed as dollars per euro. a. Suppose that the initial exchange rate is given as $1/€1, i.e.,...
1. What is exchange rate risk? 2. Explain how a soft currency restricts foreign direct investment....
1. What is exchange rate risk? 2. Explain how a soft currency restricts foreign direct investment. 3. Explain how it is possible for a country to not have its own currency. 4. What action ensures that interest rate parity holds? 5. What is the difference between a Eurodollar and a Eurocurrency? What interest rate is tied to Eurodollars? 6. Assuming a company is invested in foreign projects, a. What two factors contribute to higher risk for the projects? b. What...
Assume there exists a forward foreign exchange market in Ghana and this market has the based...
Assume there exists a forward foreign exchange market in Ghana and this market has the based on the information characteristics below. Assuming there is interest rate parity; calculate UK 90-day interest rate per annum based on the information below. 90 day interest rates (Ghana) …….13% p.a 90 day interest rates (UK) ………….? p.a Spot rate…………………………..GHS 6.1000/£ 90 day forward rate………………..GHS 6.1200/£ Assume that the Nigerian Naira exhibits a 6-month interest rate of 12 percent p.a while the U.S. dollar exhibits...
Which of the following does not affect NCO? Select one: Real interest rates paid on foreign...
Which of the following does not affect NCO? Select one: Real interest rates paid on foreign assets Real interest rates paid on domestic assets Government policies Exchange rate If a country maintains an under-valued fixed exchange rate system, then which of the following may happen? Select one: The country will earn a lot of foreign currency at the expense of its trading partner The country will have currency crisis and a sudden collapse in the value of its currency The...
Assume that interest rate parity holds and that 90-day risk-free securities yield 6% in the United...
Assume that interest rate parity holds and that 90-day risk-free securities yield 6% in the United States and 6.2% in Germany. In the spot market, 1 euro equals $1.36. What is the 90-day forward rate? Do not round intermediate calculations. Round your answer to four decimal places. $ Is the 90-day forward rate trading at a premium or discount relative to the spot rate? The 90-day forward rate is trading at a relative to the spot rate.
1- An exporter who is to receive payment in foreign currency in three months and who...
1- An exporter who is to receive payment in foreign currency in three months and who wants to engage in “hedging” would __________ the foreign currency on the three-months forward market in order to protect himself/herself from __________ of the foreign currency. a. buy; an appreciation b. buy; a depreciation c. sell; an appreciation d. sell; a depreciation 2- A given exchange rate will be more or less the same in all of the world’s financial markets because of a....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT