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Essay / Research Paper Abstract
This 11 page paper explain what is meant by interest rate parity (IRP), including the different version of the IRP model. The paper then considers if the link between spot and forward exchange rates be reconciled using the unbiased expectations hypothesis (UEH). The bibliography cites 10 sources.
Page Count:
11 pages (~225 words per page)
File: TS14_TEIRPUET.rtf
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Unformatted sample text from the term paper:
same after making an allowance for the various risk factors present in each investment (the risk premium) and after the movement and expected movement in exchange rates is accounted
for. This is very similar to the principles and operation of purchase power parity (PPP) theory and may even be perceived as an extension for the price, or return, on
capital or investments. When looking at IRP we have to consider the crossover with PPP as capital is another good that is traded.
This means that the interest rates in a country can be seen to influence the capital flows on terms of the currency exchange rates, which are a result of
the supply and demand for a particular currency. Using a risk free investment as an example, although in reality few such investments exist, the operation of interest rate parity can
be observed. If country A and country B have different inflation rates purchasing parity theory tells us the exchange rate should be one that will cause the currency with
the higher inflation to become worth less comparatively. As a result the interest rate offered in the higher inflation country should be sufficient to overcome this expected drop in currency
value and be equal to the lower inflation countries lower interest rate when adjusted ion terms of real growth and value (Nellis and Parker, 2000). This would then mean that
the real returns on the investment would be the same if IRP holds true (Nellis and Parker, 2000). The expectations of the currency
movement can be seen by looking at the forward exchange rates, the outcome of this is that if an investor wants to make money it should not be possible to
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