Help! Confused on Rf and Currency???

CFA Level III
#1

If risk free rate goes up, that will help or hurt the currency of the country? I seem get different directions from different chapters, confused! Please help, thanks a lot!!!

#2

IRP i think is hte formula you want. (1+Interest rate domenstic / 1 + interest rate foreign) * spot rate = future exchange rate. Double check the formula - i’m at work and going from memory. so the question you asked can’t be answered. why? its all relative. If the rate of a country goes up, its relative to the changes in the rates in other countries. However, all else equal, if the interest rate of one country rises, you would expect its currency to appreciate.

#3

in a long run, based on IRP, it should be relative to interest rate movements of other countries. if other countries’ rates stay the same, then this country’s currency would depreciate.

#4

In order for interest parity to hold if interest rate in one country goes up its currency should deppreciate relative to the second currency What chpter did you see that it will help the country currency? I think it might have to do with real interest rates

#5

1.10/1.05*$5/GBP = $5.23/GBP if the domestic rate goes up to 15% Then 1.15/1.05*5 = $5.47/GBP so you’re right ATPR. i was workign the math through my head earlier. which is never a wise idea with currencies.

#6

Thanks much guys!!! Especially atpr!!! Yes, I was curt, it is relative of coz. The thing is the norminal rate vs. real rate. If real rate up, currency strong. If nominal rate up, real rate same (that’s the assumption), currency will dip. Any other suggestions?

#7

foxiegroup Wrote: ------------------------------------------------------- > If real rate up, currency strong. If nominal rate > up, real rate same (that’s the assumption), > currency will dip. > You got it!!!

#8

strikershank Wrote: ------------------------------------------------------- > IRP i think is hte formula you want. > > (1+Interest rate domenstic / 1 + interest rate > foreign) * spot rate = future exchange rate. > > Double check the formula - i’m at work and going > from memory. > > so the question you asked can’t be answered. why? > its all relative. If the rate of a country goes > up, its relative to the changes in the rates in > other countries. > > However, all else equal, if the interest rate of > one country rises, you would expect its currency > to appreciate. Nope - check that again. IRP says it depreciates in the forward market immediately. edit: Oops, looks like you got it solved. Should have read farther.

#9

Thanks much guys!!!

#10

Hi Guys, This is still confusing to me. Can anybody elaborate with a good example ? Thanks

#11

foxiegroup Wrote: ------------------------------------------------------- > If real rate up, currency strong. If nominal rate > up, real rate same (that’s the assumption), > currency will dip. Sounds right, given that the nominal rate up with real rate same means more inflation and thus should cause depreciation. Was it one of Fisher’s IRP theories that brought up the idea that real risk free rates should be the same across countries (assuming perfect integration) and therefore it’s just inflation expectations explaining premium/discounts?