High Nominal Rate=Higher Demand (According to Schweser) important, currency, domestic

Nishant1

On page 50, book 2, Schweser, it says that “An increase in nominal interest rates will increase the demand for financial assets denominatd in the country’s currency.” However, in book 3, page 287: “An increase in the domestic real rate of interest causes capital to flow in from abroad. Then, the Professor’s Note says that “It is important to distinguish between an increase in real interest rates and an increase in nominal interest rates caused by an increase in inflation. If rates increase because of higher anticipated inflation, the rate increase results in a decrease in the value of the currency.”
My question is: Are the Book 2 and Book 3 statements at odds? Because if on the exam it says “Do nominal interest rates increase demand for the currency” I will be tempted to say yes, but it’s not really nominal rates that do that; it’s REAL rates.
What y’all think?

MiniMe7

real rates.
the only reason nominal rates increase is to combat inflation. so if increasing nominal rates suggest inflationary pressures, there’s no reason an investor would increase demand for that currency.
this is reflected in interest rate parity - countries with higher nominal rates should see their currencies depreciate. for example, if the spot is $2/pound and the us interest rate is 5% and the UK rate is 7%,
IRP says: fwd rate in one year = 2(1.05/1.07) = $1.96, meaning it takes less $ to buy pounds and the $ has appreciated and the pound has depreciated - due to higher nominal interest rates.

Kiakaha

Thank you Ridgefield. But what I am asking isn’t so much what the answer is, is what CFAI wants on the test. Since Schweser says in that particular section that increasing nominal rates mean more demand, if that comes up on the demand analysis vignette on the exam, I should put that it’s true, but with reference to the free market theory in book 3, it’s not?
Kinda like where Schweser says to eliminate goodwill on the balance sheet except when doing residual income calculations because CFAI says so.

trogulj

ok, i see your question and the dilemma. thanks again for making things clear schweser, glad we dropped the cash for you to confuse us.
i remember during L1 being astonished at the fact that these issues exist. tens of thousands of people depend on this material and there are errors/contradictions all over the place.

Bad5shah

An increase in nominal interest rates will increase the demand for financial assets denominatd in the country’s currency.”
When you invest in Financial Assets, you have basically hedged inflation. You might remember, investing in commodities hedges against inflation.
So with hedge inflation, increase in nominal interest rates – increase in real rates.
That is what I think, so both statements are correct.
Your statement
“Do nominal interest rates increase demand for the currency” - no, real rates do. No doubt about that :-)
Prabhash