International Fisher Effect - Revision history

Doug: Add links.

2024-08-29T15:27:47Z

Add links.

← Older revision		Revision as of 15:27, 29 August 2024
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			(IFE).

	This theory predicts that the spot foreign exchange (FX) rate will change over time to reflect and offset differences in interest rates in the respective currencies.		This theory predicts that the spot foreign exchange (FX) rate will change over time to reflect and offset differences in interest rates in the respective currencies.

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	== See also ==		== See also ==
	* [[Carry trade]]		* [[Carry trade]]
			* [[Covered arbitrage]]
	* [[Depreciation]]		* [[Depreciation]]
	* [[Emerging currency]]		* [[Emerging currency]]
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	* [[Four way equivalence model]]		* [[Four way equivalence model]]
	* [[Hard currency]]		* [[Hard currency]]
			* [[Interest arbitrage]]
	* [[Interest rate parity]]		* [[Interest rate parity]]
	* [[No arbitrage conditions]]		* [[No arbitrage conditions]]
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	* [[Purchasing power parity]]		* [[Purchasing power parity]]
	* [[Spot rate]]		* [[Spot rate]]
			* [[Uncovered arbitrage]]

	[[Category:~~The_business_context~~]]		[[Category:Financial_products_and_markets]]
	[[Category:Identify_and_assess_risks]]		[[Category:Identify_and_assess_risks]]
	[[Category:Manage_risks]]		[[Category:Manage_risks]]
	[[Category:~~Cash_management]]~~		[[Category:The_business_context]]
	~~[[Category:Financial_products_and_markets]]~~
	~~[[Category:Liquidity_management~~]]

imported>Doug Williamson: Expand example.

2021-06-22T18:11:09Z

Expand example.

← Older revision		Revision as of 18:11, 22 June 2021
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	:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.		:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.

	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an offsetting exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.

imported>Doug Williamson: Expand definition.

2021-06-22T18:05:57Z

Expand definition.

← Older revision		Revision as of 18:05, 22 June 2021
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	:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.		:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.

	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency. By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.


	:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.		:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.

imported>Doug Williamson: Expand example.

2021-06-22T18:02:50Z

Expand example.

← Older revision		Revision as of 18:02, 22 June 2021
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	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency. By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency. By an average amount that can be calculated from the interest rate differential.

			:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.

imported>Doug Williamson: Add example.

2021-06-22T17:58:34Z

Add example.

← Older revision		Revision as of 17:58, 22 June 2021
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	This is because of no-arbitrage theory, which suggests that it should not be possible to earn consistent speculative profits by speculating against Expectations Theory in any market.		This is because of no-arbitrage theory, which suggests that it should not be possible to earn consistent speculative profits by speculating against Expectations Theory in any market.


			:<span style="color:#4B0082">'''Example: Emerging market currency - carry trade'''</span>

			:A trader borrows a hard currency at an interest rate payable of 1% per annum.

			:They invest in an emerging market currency to enjoy an interest rate receivable of 10% per annum.

			:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.

			:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency. By an average amount that can be calculated from the interest rate differential.


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	* [[Carry trade]]		* [[Carry trade]]
	* [[Depreciation]]		* [[Depreciation]]
			* [[Emerging currency]]
	* [[Expectations theory]]		* [[Expectations theory]]
	* [[Fisher Effect]]		* [[Fisher Effect]]
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	* [[Forward rate]]		* [[Forward rate]]
	* [[Four way equivalence model]]		* [[Four way equivalence model]]
			* [[Hard currency]]
	* [[Interest rate parity]]		* [[Interest rate parity]]
	* [[No arbitrage conditions]]		* [[No arbitrage conditions]]

imported>Doug Williamson: Update example.

2021-06-22T17:56:16Z

Update example.

← Older revision		Revision as of 17:56, 22 June 2021
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	One way of speculating that spot exchange rate will not change by as much as ~~this, is known as an FX carry trade~~.		One way of speculating about this relationship is an FX ''carry trade''. The trader speculates that the spot exchange rate will ''not'' change by as much as predicted by the International Fisher Effect.

	Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.		Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering such FX carry trade speculations.

	This is because of no-arbitrage theory, which suggests that it should not be possible to earn consistent speculative profits by speculating against Expectations Theory in any market.		This is because of no-arbitrage theory, which suggests that it should not be possible to earn consistent speculative profits by speculating against Expectations Theory in any market.

imported>Doug Williamson: Correction. Interest rate parity, not Fisher Effect.

2021-06-22T16:12:41Z

Correction. Interest rate parity, not Fisher Effect.

← Older revision		Revision as of 16:12, 22 June 2021
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	The International Fisher Effect links Expectations Theory in FX markets with ~~the Fisher Effect~~.		The International Fisher Effect links Expectations Theory in FX markets with Interest Rate Parity.

	~~The Fisher Effect~~ predicts that forward FX rates will reflect interest rate differentials.		Interest rate parity theory predicts that forward FX rates will reflect interest rate differentials.

	Expectations Theory predicts that forward FX rates will be reflected - on average - by outturn spot FX rates for the same maturities.		Expectations Theory predicts that forward FX rates will be reflected - on average - by outturn spot FX rates for the same maturities.


	One way of speculating that spot exchange rate will not change by as much as this, is known as ~~a foreign currency~~ carry trade.		One way of speculating that spot exchange rate will not change by as much as this, is known as an FX carry trade.

	Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.		Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.
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	* [[Fisher Effect]]		* [[Fisher Effect]]
	* [[Foreign currency]]		* [[Foreign currency]]
			* [[Forward rate]]
	* [[Four way equivalence model]]		* [[Four way equivalence model]]
	* [[Interest rate parity]]		* [[Interest rate parity]]

imported>Doug Williamson: Identify links with Expectations Theory and Fisher Effect.

2021-06-22T16:09:05Z

Identify links with Expectations Theory and Fisher Effect.

← Older revision		Revision as of 16:09, 22 June 2021
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	This theory predicts that the spot foreign exchange rate will change over time to reflect and offset differences in interest rates in the respective currencies.		This theory predicts that the spot foreign exchange (FX) rate will change over time to reflect and offset differences in interest rates in the respective currencies.

	So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.		So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.


			The International Fisher Effect links Expectations Theory in FX markets with the Fisher Effect.

			The Fisher Effect predicts that forward FX rates will reflect interest rate differentials.

			Expectations Theory predicts that forward FX rates will be reflected - on average - by outturn spot FX rates for the same maturities.


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	Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.		Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.

			This is because of no-arbitrage theory, which suggests that it should not be possible to earn consistent speculative profits by speculating against Expectations Theory in any market.


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	* [[Interest rate parity]]		* [[Interest rate parity]]
	* [[No arbitrage conditions]]		* [[No arbitrage conditions]]
			* [[Outturn]]
	* [[Purchasing power parity]]		* [[Purchasing power parity]]
	* [[Spot rate]]		* [[Spot rate]]

imported>Doug Williamson: Specify that carry trade is FX carry trade.

2021-06-22T16:00:13Z

Specify that carry trade is FX carry trade.

← Older revision		Revision as of 16:00, 22 June 2021
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	One way of speculating that spot exchange rate will not change by as much as this, is known as a carry trade.		One way of speculating that spot exchange rate will not change by as much as this, is known as a foreign currency carry trade.

	Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering carry trade speculations.		Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering FX carry trade speculations.


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	* [[Expectations theory]]		* [[Expectations theory]]
	* [[Fisher Effect]]		* [[Fisher Effect]]
			* [[Foreign currency]]
	* [[Four way equivalence model]]		* [[Four way equivalence model]]
	* [[Interest rate parity]]		* [[Interest rate parity]]

imported>Doug Williamson: Add example.

2021-06-22T15:44:38Z

Add example.

← Older revision		Revision as of 15:44, 22 June 2021
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	So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.		So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.


			One way of speculating that spot exchange rate will not change by as much as this, is known as a carry trade.

			Among other things, the International Fisher Effect suggests that it should not be possible to earn consistent profits by entering carry trade speculations.