COMM 220 Chapter Notes -Foreign Exchange Spot, Interest Rate Parity, Spot Contract
Document Summary
Part 2 - interest rate parity and covered interest arbitrage. Exchange rates are not only important for considering the trade of goods and services, but also when investors are moving their money from one country to another for the purposes of financial investment. In addition most major industrialized countries have floating exchange rates, meaning the relative values of currencies fluctuates continuously throughout the trading day. You want to decide whether to invest million of your money in canada or france. Suppose the domestic interest rate in canada is the interest rate in france is. The spot exchange rate p = c$ = . 3021 or 1 = = 0. 76799 r = 3% The future exchange rate p in c$ terms = unknown ! Investing in france requires converting our dollar to , and then converting the investment return back to dollars at the end of the year.
