We see that Canada ST rate is 1.9% vs UK ST rate of 5.0%. Hence, according to IRP, should there not be an appreciation of CAD rather than GBP as is indicated by the solution on pA-11? Suppose the CAD/GBP is 2.0 You would then have 1.019/1.05*2=1.94 --> Thus CAD appreciates
Wow, it’s the same page and the same question.
If IRP can’t explain it, what is the base?
this whole question confuses the jebus out of me
UK has attractive shorterm interest rate. As an investor, I will borrow CAN at 1.9% and immediately sell CAN to buy GBP, and invest in UK bonds for 5%. By borrowing and selling GBP, I am putting more downward pressure on GBP and it will depreitate even more.
Based my search results in AF and the book. Please feel free to critique.
1, The investment period is a very short term(1-month), so IRP doesn’t apply.
2, Currency fluctuation in short term is affected by supply and demand.
3, There is a paragraph on P104. It talks about speculators less likely to short the currency. Hard for me to absorb what ut’s talking about.
Higher int rates attract fund flows to a country creating demand for that currency, leading to appreciation of that currency in short run. So Gbp appreciates in the above case. But over time IRP kicks in higher interest earned is off set by currency depn
View is one month (short term), global investors are looking to earn better risk free return. UK offers 5% so investors will look to invest there creating demand for the currency hence appreciation.