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Currencies of countries with high inflation rates tend to have forward discounts.why?
Wiki User
∙ 12y ago
This question is based on the concept of interest rate parity between two countries. A country with a high inflation rate will have high interest rates as compared to other countries. this will make it's currency to depreciate against its trading partners hence the forward discount.
Wiki User
∙ 12y ago
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What is forward premium How does the forward market help in reducing currency risk in international business?
The forward premium arises due to interest differentials between two currencies. In order that the two currencies have the same intrinsic values as they have today and avoid interest arbitrage, the premium/discount comes into effect.The forward rate includes the forwrd premium/discount and so the risk of spot market moving in the wrong way is minimised by entering into a forward contract.
How inflation rates can be used to forecast exchange rates?
The law of one price suggests that identical goods selling in different countries should sell at the same price, and that exchange rates relate these identical values, leading to purchasing power parity theory, which suggests that changes in exchange rates over time must reflect relative changes in inflation between two countries. If purchasing power parity holds true, the forward rate (Sf) can be forecast from the current spot rate (S0) by multiplying the ratio of expected inflation rates ((1+ia)/ (1+ib)) in the two counties being considered. In formula form: Sf = S0 (1+ia)/ (1+ib). where "a" and "b" represents the two countries. by Oyedeji Olufunso Oyeleke
What is forward rate?
Forward exchange rate is the agreed upon exchange rate to be used in a forward trade.
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What is forward rate in foreign exchange market?
Transaction in future date by forward contract(future delivery) to purchase/sell foreign exchange at prevailing rate.
What is forward premium How does the forward market help in reducing currency risk in international business?
The forward premium arises due to interest differentials between two currencies. In order that the two currencies have the same intrinsic values as they have today and avoid interest arbitrage, the premium/discount comes into effect.The forward rate includes the forwrd premium/discount and so the risk of spot market moving in the wrong way is minimised by entering into a forward contract.
What is the relevance of covered interest rate parity to forward contract pricing?
In freely traded (not restricted) currency pairs, Covered Interest Parity absolutely drives the forward price. This is through arbitrage In restricted currencies it may or may not drive the forward price as it is not readily arbitragable.
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Cultivating an equal opportunity society has helped countries like South Africa and Americato move forward.
How inflation rates can be used to forecast exchange rates?
The law of one price suggests that identical goods selling in different countries should sell at the same price, and that exchange rates relate these identical values, leading to purchasing power parity theory, which suggests that changes in exchange rates over time must reflect relative changes in inflation between two countries. If purchasing power parity holds true, the forward rate (Sf) can be forecast from the current spot rate (S0) by multiplying the ratio of expected inflation rates ((1+ia)/ (1+ib)) in the two counties being considered. In formula form: Sf = S0 (1+ia)/ (1+ib). where "a" and "b" represents the two countries. by Oyedeji Olufunso Oyeleke
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