Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7) Discuss the implications of the interest rate parity for the exchange rate determination.
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Introduction
Interest rate parity is a fundamental concept in international finance that relates interest rates and exchange rates. It suggests that the difference in interest rates between two currencies should be reflected in the exchange rate between those currencies. In other words, interest rate parity suggests that changes in interest rates should cause changes in exchange rates, and that there should be no arbitrage opportunities that allow investors to earn risk-free profits by borrowing in one currency and investing in another.
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