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regarding intrest rate parity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › regarding intrest rate parity

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
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  • August 9, 2022 at 3:53 am #662714
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    generally a country with high interest rate should have appreciating currency value but interest parity doesnot agree with this why sir?

    August 9, 2022 at 8:58 am #662746
    John Moffat
    Keymaster
    • Topics: 56
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    • ☆☆☆☆☆

    There are many factors that influence exchange rates. One of them is inflation (but certainly not the only one). In the exam we use purchasing power parity to forecast future exchange rates and I explain the logic in my lectures.

    Interest rate parity is used both in the exam and in real life to determine forward exchange rates.

    August 9, 2022 at 10:21 am #662764
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    sir one the reason was also interest rates. How can interest rate influence demand for exchange rate?

    August 9, 2022 at 3:38 pm #662777
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53175
    • ☆☆☆☆☆

    On the one hand higher interest rates can increase demand for a currency which in turn can lead the currency to appreciate. However, higher nominal interest rates generally go with higher inflation (the Fisher effect) and higher inflation can lead a currency to depreciate in value.

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