imported>Doug Williamson |
imported>Doug Williamson |
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| 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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| So for example, unhedged currency depreciation losses will on average negate and match exactly any gains on interest differentials between the two currencies.
| | An international organisation created by the Bretton Woods Agreement in 1944 to promote exchange rate stability. |
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| | | The objectives of the Fund include supervising exchange market intervention of member countries, providing the financing needed by members to overcome payments imbalances, encouraging monetary cooperation and international trade among nations, promoting sustainable development and poverty reduction. |
| The International Fisher Effect links Expectations Theory in FX markets with Interest Rate Parity. | |
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| Interest rate parity theory predicts that forward FX rates will reflect interest rate differentials.
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| 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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| 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.
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| 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.
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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.
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| == See also == | | == See also == |
| * [[Carry trade]] | | * [[Bretton Woods Conference]] |
| * [[Depreciation]] | | * [[Exchange rate]] |
| * [[Expectations theory]]
| | * [[Exchange Rate Mechanism]] |
| * [[Fisher Effect]]
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| * [[Foreign currency]]
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| * [[Forward rate]]
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| * [[Four way equivalence model]]
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| * [[Interest rate parity]]
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| * [[No arbitrage conditions]] | |
| * [[Outturn]]
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| * [[Purchasing power parity]]
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| * [[Spot rate]]
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| [[Category:The_business_context]]
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| [[Category:Identify_and_assess_risks]]
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| [[Category:Manage_risks]]
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| [[Category:Cash_management]]
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| [[Category:Financial_products_and_markets]]
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| [[Category:Liquidity_management]]
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(IMF).
An international organisation created by the Bretton Woods Agreement in 1944 to promote exchange rate stability.
The objectives of the Fund include supervising exchange market intervention of member countries, providing the financing needed by members to overcome payments imbalances, encouraging monetary cooperation and international trade among nations, promoting sustainable development and poverty reduction.
See also
