3. a. Explain the IRP theory. b. How does the IRP theory contribute to the foreign...
3. a. Explain the IRP theory.
b. How does the IRP theory contribute to the foreign exchange determination?
Homework Answers
A.
Interest Rate Parity is theory in which the differential between the irates of two countries remains equal to the differential calculated by using the forward exchange rate and the spot exchange rate techniques. It play a crucial role in the forex markets.
B.
IRP theory comes in handy in analysing the relationship between the spot rate and a relevant forward rate of currencies.According to this theory,there will be no arbitrage in interest rate differentials between two different currencies and the differential willl be reflected in the discount or premium for the forward exchange rate on the foreign exchange.
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3. a. Explain the IRP theory.
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