DD6.txt - This is the standard interest parity condition Note that f is defined as pounds per dollar If the gold standard is efficient we would expect

DD6.txt - This is the standard interest parity condition...

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This is the standard interest parity condition. Note that f is defined as pounds per dollar. If the gold standard is efficient we would expect the forward exchange rate to equal to official exchange rate (we should rationally expect that the gold market tends toward equilibrium and the official prices hold). Thus, one should expect that f = .20. Plugging this into our no-arbitrage condition implies that: i_{US} = i_{UK} In other words, the interest rate in both countries should be the same. There is a world interest rate that is determined in international markets. However, remember that this is an equilibrium condition. Thus, at an point in time there is no guarantee that this condition holds. In fact, in our arbitrage condition, we assumed that there are no transaction costs associated with this sort of opportunity. In addition, under the gold standard, we do not have to
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  • Fall '15
  • DR. Aimal
  • Arbitrage, United States dollar, Forward Exchange Rate

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