week3-4 - Exchange Rates and the Foreign Exchange Market:...

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Exchange Rates and the Foreign Exchange Market: An Asset Approach (cont.) Viktoria Hnatkovska week 3-4 1
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Uncovered interest rate parity (UIP): Investors are subject to the foreign exchange rate risk. Assumes that investors do not require higher return to bear this exchange rate risk: r $ = r eur + E e $ =eur ± E $ =eur E $ =eur : must be the same. Spot rate: exchange rates for immediate currency exchanges (within a day or two). Forward rate: exchange rates for currency exchanges that will occur at a future (for- ward) date (30 days, 60 days, etc.). CIP links the forward rate and spot rate to the interest di/erential. Since all rates are known at the beginning of the investment period, CIP describes a true arbitrage relationship, unlike UIP. 2
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This note was uploaded on 05/06/2010 for the course ECON Econ 365 taught by Professor Hnatkovska during the Spring '09 term at The University of British Columbia.

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week3-4 - Exchange Rates and the Foreign Exchange Market:...

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