Economics - Currency Forwards currency, domestic, equation, interest, relative

ishfaque

The equation is: Forward FC/DC = Spot (1 + r)FC/(1 + r)DC…
logically, if the interest rate is higher in the Domestic country (1 + r)DC relative to the interest rate in the FC, wouldn’t you expect the currency of the domestic country to appreciate relative to the FC?

LorrinCFA

search. been answerd 100 times in last week month. think about nominal interest rates, not real interest rate.

troymo

Yes, you are correct. If (real) interest rates are higher in a country, its currency will appreciate. So, the Future Spot Price is expected to appreciate.
But, here we are talking about Forward Price and not future expected spot price.
And Currency Forward price is solely based on no-arbitrage rule at time 0 and NONE of the mumbo jumbo coming from macro/micro economic fundamentals.