Question

Explain how each question is relevant to international markets. Give examples.

1. Define the Fisher Effect and explain why it's application is relevant to international markets.

2. What are the methods of Central Banks' intervention in the currency markets, how does this intervention effect the domestic and international FX markets.

Answer 1

1. Fisher Effect means it states the relationship between the interest rates and rate of inflation.It describes nominal interest rate as Real Interest Rate plus the inflation rate.

Formula proposed by Fisher is

(1+NIR) = (1+RIR)(1+IR)

Whereas , NIR is Nominal Interest Rate

RIR is Real Interest Rate

IR is Inflation Rate

2. Even though there are many methods Of intervention in the currency markets by Central Banks, there are four standardized methods.

They are SIZE,TIMING,MOMENTUM,STERLIZATION.

Sterlization is the long term modification in the country.