Purchase Solution

International Interest Rates

Not what you're looking for?

Ask Custom Question

The issue of differences in international interest rates is quite relevant and interesting as it determines a large part of capital flows.

Why would we expect the difference in the 1-year interest rate on the dollar vs the 1-year interest rate on, the Euro or any other freely convertible currency, to match exactly the anticipated depreciation/appreciation of the dollar vs the foreign currency over the same one year? In other words, why are all real interest rates in all major currencies exactly equal, adjusted for the anticipated depreciation/appreciation of one currency relative to another one?

Purchase this Solution
Solution Summary

The solution explains how forward interest rates are related to interest rate differential

Solution Preview

This happens because otherwise there is a possiblity of making making profits without incurring any risk due to arbitrage.

Let us take an example. The 1 year interest rate in US is 3% and in Europe it is 4%. There is a differential of 1%. The spot rate between US Dollar and Euro is 1.23 i.e., 1 Euro is worth 1.23 USD. Suppose you borrow $100 in US for 1 year at the prevailing rate of 3%. That at the end of 1 year you have to repay USD 103. You convert $100 to Euro now. ...

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.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • International Trade Flows for Mesa Company

    Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant). 3. Mesa believes international capital flows shift in response to changing interest rate differentials.

  • Global Business Environment

    Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).

  • International Business and Local Business

    References: http://www.slideshare.net/tutor2u/business-and-interest-rates http://www.slideshare.net/tutor2u/buss4-exchange-rates http://tutor2u.net/economics/content/topics/exchangerates/econ_effects.htm The expert explains how international business

  • Foreign exchange risk, interest rate and exchange rates

    62284 Foreign Exchange Risk, Interest Rate and Exchang Rates In international cash management, managers have a choice between managing only foreign exchange risk or managing foreign exchange and interest rate risk together.

  • What does this concept imply about the long-run profit opportunities from investing in international markets?

    According to interest rate parity, the forward rate premium or discount of a currency should reflect the differential in interest rates between the two countries.

  • International Fisher Effect (IFE)

    166133 International Fisher Effect (IFE) Assume U.S. interest rates are generally above foreign interest rates. What does this suggest about the future strength or weakness of the dollar based on the IFE?

  • Trade deficit and interest rates

    This solution goes over international economic concepts including trade deficit and interest rates.

  • International Fisher Effect

    Mary Jones does not believe that the International Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the United States are 3 percent.

  • International Fisher Effect (IFE)

    166150 International Fisher Effect (IFE) Shouldn't the IFE discourage investors from attempting to capitalize on higher foreign interest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?

  • Fisher Effect- U.S and the Euro inflation and currency rates

    The International Fisher Effect (IFE) suggests that a currency's value will adjust in accordance with the differential in interest rates between two countries.

View More Related Solutions