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Can you please tell me the effects of inflation rate & interest rate on spot rate & forward rate according to Fisher Model?
If there is an increase in inflation then the spot rate will also arise?
If there is an increase in interest rate then the forward rate will also arise?Thanks in advance!
If the inflation rate in the ‘foreign’ country is higher than the inflation rate in the ‘home’ country, then the spot rate when the ‘foreign’ currency is quoted against the ‘home’ country will increase.
The same applies to forward rates when the ‘foreign’ interest rate is higher than the ‘home’ interest rate.
I do explain both of these, with examples, in my free lectures.
Is it correct to say that increase in the rate of inflation or interest in one currency will cause the currency to depreciate while the impact on the other currency will appreciate?
For example:
1) If there is an increase in the rate of inflation or interest of Foreign currency, the spot rate & forward rate against the Local currency will increase (as u said) causing Foreign Currency to depreciate while Local Currency to appreciate.2) However, if there is an increase in the rate of inflation or interest of Local currency, the spot & forward rate against the Foreign currency will decrease causing Foreign Currency to appreciate while Local Currency to depreciate.
Please correct the two statements above if there is anything incorrect!
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