- This topic has 5 replies, 2 voices, and was last updated 1 year ago by
.
- Posts
sir i have a doubt as i am not able to understand difference between two situations
in the governement monetary policies, it is stated that increase in interest rate will lead to appreciation of foreign exchange rate(due to foreign investment)
however in the interest rate parity it is stated that the company with higher interest rate will have a depreciation in its currencythere was a question in pre december mock
which of the following statement is correct on of the option was
the higher interest rate of pesos relative to dollars will lead to appreciation of its exchange rate, i thought it was correct but the answer was wrong
i don’t understand as the option did not states whether it’s talking about forward rate or spot rate, and i guess it is the forward rate that will depreciate .please helpThe first sentence is just saying
As a general rule, the higher the interest rate, the more valuable a country’s currency is likely to be.
This appreciation in the exchange rate is caused by a growth in demand for that particular currency, as higher interest rates will attract more foreign investment.You have stated that you have read and understood the statement
however in the interest rate parity it is stated that the company with higher interest rate will have a depreciation in its currency
So this is wrong
the higher interest rate of pesos relative to dollars will lead to appreciation of its exchange rate,But sir i just wanted to understand why the question applied interest rate parity and not the general rule here
And also the interest rate parity is for forward rate and the question didn’t state anything about forward rateCan you send me the actual question
If you want a clear answer I need to see in detail what you are askingWhat I can say is IRPT predicts that a country with a higher IR will see the forward rate for its currency subject to depreciation.
Not all questions are clear, they are sometimes written with less detail than you would expect to test your knowledge.
YOU MUST STOP QUESTIONING EVERYTHING THAT IS WRITTEN by writers and by examiners.
How many times have I written this to you now?okay sir i will do as you say.
sir there was a question which i answered wrong so i just want to clarify two things.
the question was whether the purchase of OTC derivative by a firm is primary money market or secondary money market?
i thought the answer would be secondary but it actually was primary
SO in basic if we purchase any OTC contract like forward contract or otc option it will be a primary money market
and on the other hand any currency futures or exchange traded options will be secondary money market…right sir?In basic terms, the classification of financial instruments as primary or secondary money market depends on their characteristics and where they are traded, rather than whether they are OTC or exchange-traded.
The primary money market refers to the market where newly issued securities are bought and sold directly between issuers and investors. It includes instruments such as Treasury bills. These are typically short-term and have low risk.
The secondary money market, on the other hand, refers to the market where previously issued securities are bought and sold among investors. It includes instruments such as stocks and bonds. These instruments can be traded on exchanges or over-the-counter.
Currency futures and exchange-traded options are typically traded on exchanges, making them part of the secondary money market. The classification of forward contracts can vary depending on their characteristics and where they are traded. They can be both OTC and exchange-traded.
Therefore, it is not accurate to categorize OTC contracts like forward contracts or OTC options as exclusively belonging to the primary money market. The classification of financial instruments as primary or secondary money market depends on their characteristics and where they are traded.
- You must be logged in to reply to this topic.