Factors affecting foreign exchange rates - part 2
Taught by Ben Wilson · AI tutor support included
You'll learn how interest rate differences drive foreign exchange movements—a key factor tested in FM and AFM papers. This lesson walks you through interest rate parity theory, showing why higher interest rates initially strengthen a currency but weaken it over time as investors withdraw their funds.
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In this lesson
- 0:00 Interest rate parity theory explained
- 0:34 Why investors prefer higher interest rates
- 0:53 Short-term strengthening, long-term weakening
- 2:16 Forward rate formula and components
- 3:48 Worked example: JPY to EUR calculation
- 4:48 Summary: inflation and interest rate parity
About this lesson
You'll work through a real example comparing Japanese yen and euro rates, then apply the forward rate formula to calculate exactly how exchange rates adjust. By the end, you'll understand why countries with higher interest rates see their currencies depreciate in the forward market, and you'll be able to solve these problems with confidence in your exams.
Duration: 5m
Transcript
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