Interest Parity Condition
Not what you're looking for?
Would the interest parity condition change if all foreign exchange transactions were subject to a 1% transaction fee? If not, explain why. If yes, explain how you would drive the new interest parity condition. When would an investor prefer this type of transaction fee to one in which they paid a flat fee for each foreign exchange transaction?
Purchase this Solution
Solution Summary
The solution goes into a fair amount of detail related to interest parity condition. The solution not only answers the question being asked but also goes on to explain some other related concepts as well. The response explains the concepts very well and in detail. It is ideal for students looking to get a detailed understanding of the topic. Overall, an excellent response.
Solution Preview
Interest Parity Condition holds when the rate of return on dollar deposits is just equal to the expected rate of return on foreign deposits. Let's define:
Id = domestic interest rate of dollars
If = foreign interest rate
E = spot foreign exchange rate (dollars per foreign currency)
F = forward exchange rate (dollars per foreign currency)
Then, we consider Interest-Rate Parity first
1. the concept of equal returns
if the returns are equal on either transactions, that is, if interest-rate arbitrage has the same equalizing effect of ...
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.