The interest rate parity relation

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The interest rate parity relation can be represented by the following equation:

1 + i = (1 + i*) E/E^e

where i is the domestic interest rate, i* the foreign interest rate, E and E^e are the actual and expected exchange rate, respectively. Referring to this equation as needed, explain why investors pay attention to the exchange rate when making investments across countries.

Reference no: EM13766813

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