Great video i love it but I dont understand one think. Why do foreign investors buy the Czech crown and invest it there, when according to the IRP they should ultimately have the same appreciation of the investment/ROI as at home (in countries with lower interest rates)? Thanks for answer and have a good day
@@milanjaukl6819 I would assume they are doing this on an uncovered basis. Investors may be investing there directly and refusing to hedge it back into dollars. In this case, they would be taking on additional risk, and receiving (hopefully) extra compensation for taking this risk. As an aside - Interest rate parity really only works when we compare countries with the same level of default risk. So, once we get out of the top economies of the world, with a stable currency, interest rate parity may no longer hold.
I guess it's because that the extra interest rate you earn would be in USD. So, as a Japanese citizen, you would again convert it to JPY.. (Invested value+extra interest income).. Which would increase the demand for JPY and appreciate it more, compared to the previous time, which depreciated JPY only as a result of previously Invested value.
Dear Friends, I have a question: in IRP (Interest Rate Parity), the base rate of the two currencies is the nominal interest rate or the real interest rate announced by the central banks of the two countries?.
Hi. The base rate is the nominal rate. It will be an investable rate, such as the 3 month bill (if we are using 3-month forward currencies), and it will be the nominal rate.
how does the Yen get stronger when the US has higher interest rates and in theory creates a stronger currency as we've seen over the last year???? it seems like the equation should be 1.02/1.01 *150 = 151.49
The forward yen rate will trade at a premium to the spot yen rate when the US has higher interest rates. However, what you say is true in the sense that, over time, the yen spot may continue to depreciate in the face of higher rates. But even so the yen forward will continue to trade at a premium to the yen spot. Both can be true. In fact, one of the reasons the yen has depreciated is that many traders borrow yen (due to its low rates) and invest in dollars (due to the higher rates). This is the yen-carry trade and is what we’d call “uncovered” interest rate arbitrage.
