n******m
发帖数: 169 | 1 Suppose current EUR/USD=1.2
interest rate of EUR is 5%,
interest rate of USD is 1%.
The forward price of EUR/USD (in one year), by no arbitrage argument, is
then given by 1.2*e^{1%-5%}, which is less than 1.2
However, it is generally believed that raising interest rate will translate
into a rise of the value of underlying currecy. In reality, people have a
greater interest in holding high-interest-rate currencies. The demand then
will drive the price of the currency higher. So, if the interest rate
difference stays as 4% for the rest of the year, EUR/USD should have a high
probability to reach a price higher than 1.2.
This seems to contradict the forward price formula of foreign currencies.
Can anyone explain? | s*z
发帖数: 37 | 2 I think the supply-demand has already been reflected by the current exchange
rate 1.2. | x**0
发帖数: 9 | 3 It might be Interest Rate Parity. U can google to find it. | a********e
发帖数: 508 | 4 the fact that the expected value pf EuR/USD is greater than its forward
price
does not lead to any contradiction. In fact it is a trading strategy as you
already mentioned.
Just think about the case why would the expected price of a stock is higher
than the forward price of the stock with the same maturity. As you can see,
there are some uncertainty involved in the former case
translate
high
【在 n******m 的大作中提到】
: Suppose current EUR/USD=1.2
: interest rate of EUR is 5%,
: interest rate of USD is 1%.
: The forward price of EUR/USD (in one year), by no arbitrage argument, is
: then given by 1.2*e^{1%-5%}, which is less than 1.2
: However, it is generally believed that raising interest rate will translate
: into a rise of the value of underlying currecy. In reality, people have a
: greater interest in holding high-interest-rate currencies. The demand then
: will drive the price of the currency higher. So, if the interest rate
: difference stays as 4% for the rest of the year, EUR/USD should have a high
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