Interest Rate Parity Case Study

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1. The definition of interest rate parity is the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. The investors through interest rate differentials and forward exchange rates for different countries to achieve arbitrage activities. With uncovered arbitrage ongoing, forward rate differential will continue to increase, the rate of return offered by the two currencies until completely equal, then covered arbitrage activities will stop, exactly equal to the difference between the two countries forward interest rate, namely interest rate parity holds. The arbitrage opportunity in the across different currencies when the parity breaks down. (Madura, 2011) According the theory, the student may achieve to made easy money. For example, assume 1 year interest rate 5% in US (home) and 10% in UK(foreign) , the spot rate is $1=£0.7558 Forward premium = (1+0.05)/(1+0.10)-1 = 0.045 or 0.45% The forward rate is £0.7558(1+0.045) = £0.79 If US…show more content…
The companies can’t to establish according their necessary. The market price must daily settlements and handle by exchange clearinghouse. The companies need to obligation to purchase or sell on a specific settlement date which set by financial institution. It had more regulation, such as Futures Trading Commission and National Future Association to regulation. Conclusion The US Company use forward or future contract to lock in the exchange rate to decrease the risk, benefit for future trade in China. They’re expects to receive Renminbi in the future , so I recommend to choice future contract, they can pay after six months when they’re received Renminbi and transaction costs less than forward contract and easier to establish the contract with the broker. 3. No of words: 361 How to adding value on the

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