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标题: Question on Forward/Spot Rate and Interest Equilibrium [打印本页]

作者: SkipE99 时间: 2011-7-11 19:03 标题: Question on Forward/Spot Rate and Interest Equilibrium

I encountered this equation while reading the Schweser's Notes on Forward/Spot Rate

Domestic Interest Rate - Foreign Interest Rate = (FWD Exchange Rate - Spot Exchange Rate) / Spot Exchange Rate

Exchange Rates are expressed as DC/FC

Let's assume D-interest is > F-interest, that would make the left side positive. This means FWD > Spot Rate for the right side to also be positive. Since exchange rate is expressed as DC/FC, this means the domestic currency must have depreciated against the foreign currency.
FWD = $1.2 / peso Spot = $1 / peso

Now let's go back to the left side. If D-interest > F-interest, this means domestic currency will rise since the real interest is higher for domestic country. Which means domestic currency will appreciate..

Why do these two contradict each other?

Regards

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