The ma cashbackforexcalculatorOnline impact of cashbackforexpipcalculator cashback forex calculator Online on cashbackforexprofitcalculator rate The impact of interest rate on exchange rate is mainly from two aspects: current account cashback forex capital account Current account: the change of interest rate will affect the cost of enterprises, which will affect exports, causing changes in the balance of payments, and ultimately affect the movement of exchange rate If the interest rate rises, the cost of enterprises will increase, making exports less competitive, reducing the export value, causing the balance of payments Capital account: changes in interest rates affect the balance of payments by affecting arbitrage capital flows, ultimately affecting exchange rate movements. The impact of the exchange rate on interest rates from two aspects: the current account and capital account Current account: exchange rate changes will affect the balance of payments through changes in the relative prices of products, ultimately affecting interest rates Such as the depreciation of the national currency, the relative decline in the price of exports, the relative increase in the price of imports, resulting in increased exports, reduced imports and trade surpluses, increased foreign exchange reserves, increased placement of domestic currency, and finally lead to a decline in interest rates Capital account: exchange rate changes will affect the direction of international arbitrage capital through investors expectations of future exchange rate changes, which will eventually affect interest rates, such as the depreciation of the national currency. After the rebound, it will lead to the inflow of international arbitrage capital, in order to maintain the stability of the currency, it may lead to a decrease in interest rates Interest rate parity theory and theoretical flaws Interest rate parity theory is the theory of forward exchange rate determination proposed by Keynes and Einziger They believe that the equilibrium exchange rate is formed through international sell, complement, arbitrage caused by foreign exchange transactions In the case of differences in interest rates between two countries, capital will flow from However, when comparing the rates of return of financial assets, arbitrageurs not only consider the rates of return provided by the interest rates of the two assets, but also the changes in the returns of the two assets due to changes in exchange rates, i.e., foreign exchange risk This theory is flawed, mainly in that: 1 Interest rate parity does not take into account transaction costs However, transaction costs are a very important factor if the various transaction costs If the transaction costs are too high, it will affect the arbitrage return, thus affecting the relationship between the exchange rate and the interest rate If the transaction costs are considered, international arbitrage activities will stop before reaching interest rate parity 2 Interest rate parity assumes that there are no barriers to capital flows, assuming that funds can flow smoothly and unrestrictedly between international flows But in reality, the flow of funds between international flows will be hindered by factors such as exchange controls and underdeveloped foreign exchange markets At present, only a few international financial centers have well-developed foreign exchange markets. 3 Interest rate parity assumes that the size of the arbitrage capital is unlimited, so the arbitrageur can continuously carry out the throw and fill arbitrage until the interest rate parity is established. With the continuous throw, fill and arbitrage, the forward spread will increase until the two assets provide exactly the same rate of return, at which point the throw and fill arbitrage activity will stop. The forward spread is exactly equal to the interest rate differential between the two countries, i.e., interest rate parity is established. Therefore, we can summarize the basic idea of interest rate parity: the forward spread is determined by the difference in interest rates between the two countries, and the currency of the high interest rate country must fall in the futures market, and the currency of the low interest rate country must rise in the futures market. The capital account: affects the balance of payments and ultimately the interest rate through investors expectations of future exchange rate movements, which affects the direction of international arbitrage capital and ultimately the interest rate Theoretical flaws The theory of interest rate parity does not take into account transaction costs The theory assumes that there are no barriers to capital flows and that there are no restrictions on smooth international flows The theory assumes that the size of arbitrage capital is infinite, so arbitrageurs can continue to sell their arbitrage until Interest rate parity is established
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