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Sir on page 385 of kaplan study text it is written that higher interest rate will lead to more capital inflow and hence higher demand for domestic currency …which will lead to appreciation of domestic currency
But sir interest rate parity theory states that country with higher interest rate will have depreciation in it’s currency
I don’t get why two different interpretationsDon’t take everything you read as being right in every situation. You have got to stop questioning everything. You’re making your studies very complicated.
I’m not here to answer constant questions from you.
It depends on the relationship between interest rates and exchange rates, it is quite complex and can be influenced by various factors such as inflation rates, market expectations, and economic conditions.
Higher interest rates “can” attract more capital inflow, leading to an increased demand for the domestic currency. This increased demand “can”potentially lead to the appreciation of the domestic currency. But the word can means doesn’t always.
Okay sir got it
The theory is therefore that the expected dollar return on dollar deposits is the same as the expected dollar return on foreign currency deposits. If this theory did not hold up, investors holding the currency with the lower interest rate would switch to the other currency for some period of time, ensuring that they would not make a loss on returning to the original currency by fixed the exchange rate in advance using a forward contract.This is known as arbitrage. If enough investors acted in this way, the forces of supply and demand would lead to a change in the forward exchange rate so that risk-free profit making was not possible.
Sir the above quotes were from acca study hub….kindly explain it sirCan I check if you are watching all of our free lectures? They should give you a clear understanding of the subject and be good enough for you to pass the exam.
As for asking us to clarify what you have read in other books or from the hub, you can’t simply expect us to be a private tutor and explain and settle your understanding of everything.
I am happy to explain anything from our notes or lectures that you don’t understand, or help you with a question from the kit or text, but I am now limiting what you ask and what I respond to.
To clarify a final point, I am not your personal tutor, I do not have unlimited time, and
I have other students to help so there are limits, and I will not disadvantage others.
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