Interest rate parity and Interest rate risk: Difference between pages

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(IRP).
The risk associated with a change in interest rates.  
 
This theory describes the expected relationship between spot rate and forward foreign exchange rates, and the interest rates in the related currency pair.
This may take several forms; increasing interest cost, changing market value of debt or of pensions liabilities, differences in competitiveness, or the changing nature of a market when interest rates change.
 
Under efficient market conditions the interest rate parity theory predicts that the forward FX rate (available in the market today) should be equal to the spot FX rate, adjusted for the difference in interest rates between the currency pair over the relevant period.
 
 
IRP holds very strongly for actively traded currency pairs; less so for currencies which are not so actively traded.  




== See also ==
== See also ==
* [[Arbitrage]]
* [[Asset-liability management]]
* [[Carry trade]]
* [[Exposure]]
* [[Covered interest arbitrage]]
* [[Efficient market hypothesis]]
* [[Expectations theory]]
* [[Fisher Effect]]
* [[Foreign exchange]]
* [[Forward foreign exchange rate]]
* [[Forward forward rate]]
* [[Four way equivalence model]]
* [[Interest rate]]
* [[Interest rate]]
* [[Interest rate parity]]
* [[Matching]]
* [[International Fisher Effect]]
* [[Pipeline risk]]
* [[No arbitrage conditions]]
* [[Risk free rate of return]]
* [[Parity]]
* [[Time bins]]
* [[Purchasing power parity]]
* [[Spot rate]]


[[Category:Manage_risks]]
[[Category:Interest_Rate_Risk]]

Revision as of 18:31, 15 June 2014

The risk associated with a change in interest rates.

This may take several forms; increasing interest cost, changing market value of debt or of pensions liabilities, differences in competitiveness, or the changing nature of a market when interest rates change.


See also