Define the implications of the interest rate parity, Financial Management

Assignment Help:

Discuss the implications of the interest rate parity for the exchange rate determination.

Answer: Presume that the forward exchange rate is roughly an unbiased predictor of the future spot rate, IRP can be illustrated as:

          S = [(1 + I£)/(1 + I$)]E[St+1|It].

So the exchange rate is determined by the relative interest rates, and the supposed future spot rate, conditional on all the accessible information, It, as of the present time. So, one can say that expectation is self-fulfilling. As the information set will be constantly updated as news hit the market, the exchange rate will show a highly dynamic, random behavior.


Related Discussions:- Define the implications of the interest rate parity

Types of rating - sovereign rating, Sovereign Rating This...

Sovereign Rating This includes rating a country as to its creditworthiness, probability of default, etc.

Analyze the corporate financial statements, You are currently an Analyst wo...

You are currently an Analyst working for a finance publication firm and as part of your responsibilities; you are required to provide a monthly forecast and analysis of certain com

Regulatory aspect in employees provident fund organization, Regulatory Aspe...

Regulatory Aspect Employees Provident Fund Organization (EPFO) is under the Ministry of Labor and is a primary organization for retirement income for private employees in India

Cash deficit - cash budget, In two of the four months of the cash budget Th...

In two of the four months of the cash budget Thorne Co has a cash shortage with the highest cash deficit being the opening balance of $40000. This cash shortage which has occurred

Long-term debt finance, The approaches that Blin could accept regarding the...

The approaches that Blin could accept regarding the relative proportions of long- and short-term finance to meet its working capital needs have been described as moderate, conserva

Effect of volatility and the arbitrage free value, The volatility ass...

The volatility assumption has a great influence on the arbitrage free value of the bond. The higher the expected volatility, the greater the value of an option. W

Determine the change in profit, (a) The BEQ is 200 customers per month, i.e...

(a) The BEQ is 200 customers per month, i.e. $3,000 / ($20 - $5) (b) The margin of safety is 300 customers, i.e. 500 - 200 (c) Graph (d) New break-even is 334 customers, i

Compare and contrast the potential liability, Compare and contrast the pote...

Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations. The sole proprietor has limitless liability for ma

Analysis of the capacity to pay, In addition to management quality, a...

In addition to management quality, an assessment of the financial capacity of a company should also include an evaluation of trends, regulatory environment, basic

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd