Chapter_14_-_Interest_Rate_Parity

Chapter_14_-_Interest_Rate_Parity - Chapter 14: Exchange...

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Definitions Exchange rate: the price of one currency in terms of another. Depreciation: a decrease in the value of a currency. Appreciation: an increase in the value of a currency. If E DC/FC , then DC depreciates and FC appreciates. Foreign exchange market: the market in which international currency trades take place. Spot exchange rates (E DC/FC ): today’s exchange rate. Forward exchange rates (F DC/FC ): the exchange rate that is contracted today for the exchange of currencies at a specified date in the future. Forward discount and forward premium Expected exchange rates (): the exchange rate that agents are expected to prevail in the future. Equilibrium in the Foreign Exchange Market: Interest Rate Parity (Asset Approach to the Exchange Rate) Suppose I have two investment options: one is to invest in DC denominated deposit and the other one is to invest in FC denominated deposit. Which deposit should I choose? 1
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Chapter_14_-_Interest_Rate_Parity - Chapter 14: Exchange...

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