I remember something like: if left side of equation > right side, then borrow domestic, lend foreign or vice versa But I can’t find the answer. Can someone please help me out… Regards
Investors will borrow domestic and lend foreign when the domestic interest rate, plus the expected appreciation of the domestic currency is less than the foreign interest rate. Always think of the cost of international borrowing as the interest rate plus the change in the exchange rate; You’ll have to pay back the loan in the original currency. I think that it’s usually easier to approach these things in conceptual terms rather than through a formula. You will be able to work out the formula based on the intuition. The IRP theory states that similar-risk rates, when adjusted for expected exchange rate changes, should be identical everywhere.