Issue of differences in international interest rates

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Reference no: EM1367764

The issue of differences in international interest rates is quite relevant and interesting as it determines a large part of capital flows.

Explain why would we expect the difference in the one year interest rate on the dollar vs one year interest rate on, the Euro or any other freely convertible currency, to match exactly the anticipated depreciation/appreciation of the dollar vs the foreign currency over the same one year? In other words, why are all real interest rates in all major currencies exactly equal, adjusted for the anticipated depreciation/appreciation of one currency relative to another one?

Reference no: EM1367764

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