chapter money, interest rates, and the exchange rate.pptVIP

* THE INTEREST RATE AND THE EXCHANGE RATE IN THE SHORT RUN To eliminate ER risk: buy FX in spot exchange market and at same time sell in forward exchange market with a delivery date that coincides with the maturity of the investment/saving Usually, the international flow of funds continues until the forward premium or discount equals the interest rate differential The interest rate differential is exactly balanced by the loss or gain of buying and selling currency (F-S)=(i-i*) THE INTEREST RATE AND THE EXCHANGE RATE IN THE SHORT RUN Interest rate parity : the rate of return in both count