International Fisher Effect: Difference between revisions
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imported>Doug Williamson (Add example.) |
imported>Doug Williamson (Specify that carry trade is FX carry trade.) |
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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]] | ||
Revision as of 16:00, 22 June 2021
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.
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 foreign currency 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.
