4 ms·
Well, uncovered interest rate parity would have DEF strengthen not ABC. There are indeed other mechanisms, e.g., currencies with higher interest rates experien
by RandomLensman 4y ago
Well, uncovered interest rate parity would have DEF strengthen not ABC.
There are indeed other mechanisms, e.g., currencies with higher interest rates experiencing higher demand, but that also has limits/doesn't hold strictly etc.
- danuker 4y agoHuh? Say you own DEF. Wouldn't you rather trade it for ABC to gain more interest?
- RandomLensman 4y agoWould you really go into "broken currencies" with high interest rates, for example? The carry trade in FX, i.e., borrow in low yielding currency invest in high yielding currency is a classic trade, but it is not risk free. FX can move against you. Basically, uncovered interest rate parity says that the interest rate differential creates an offsetting effect in the FX rate. Empirically, that is a bit shaky/doesn't always manifest, there are debates on time horizon, etc., though. In short, FX not easy to predict.
- kgwgk 4y agoThe scenario was presented as follows: > ABC's central bank has 10% interest rates. DEF's central bank has 1% interest rates. […] You could borrow DEF 1B, convert to ABC, earn 10% interest and then pay it back later. If the exchange rate remains fixed, that would be a risk-free return of 9%. If you have now 100 ABC = 100 DEF you have the choice of getting in 1 year 110 ABC or 101 DEF. If ABC depreciates against DEF and in one year 1 ABC = 0.918 DEF both choices become equivalent.