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I can’t figure out the relationship between interest rate n exchange rate.
Can you please tel me how the interest rate effects the exchange rate. And what is interest rate parity?I think exchange rate is the rate at which one currency is exchanged for another. The interest rate is simply the cost or borrowing or lending.
The IRPT I saying that the difference in prices in two different countries is as a result of their interest rates.My dear sister , i suggest you the last f9 lecture and hopefully that would really help.
Actually in real world there are alot many things affecting the exchange rates but if keep all other things constant except inflation then theres exchange rate parity theory . whereas if u keep all things constant except the interest rates then the effect on exchange rates is wht we call interest rate parity theory. I dont think the question WHY is in our f9 syllabus, but still, Mr:john’s reply would be the final one.
hope it helped a little:-)Saad Bin Aziz is correct – there are many things in real life that affect exchange rates and it is impossible to forecast what it will be in the future.
However, inflation rates are one factor, and purchasing power parity forecasts the effect of these.
In theory inflation rates and interest rates move up and down together (and do tend to in practice in the long term) and so you can use exactly the same formula for forecasting using interest rates as you do using inflation rates (just using the interest rates in the formula instead of the inflation rates)
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