Rate Parity, the theory that the difference between two countries’ interest rates is equal to the difference between the forward Rate and the spot Rate.
This theory was developed by Keynes and Eindzig.
The theory of interest parity argues that as long as there is a gap between the interest rates of two countries in the same period, investors can make use of arbitrage or other ways to earn the spread, and the fluctuation between the two countries will occur because of such arbitrage behavior until the space for arbitrage disappears.
According to the theory of interest parity, the interest rate gap between two countries will affect the currency level of the two countries and the movement of capital, and then affect the difference between and.
In equilibrium, the forward rate’s discount should probably equal the gap between the two rates, otherwise there will be risk-free arbitrage that will bring it back to equilibrium. Hawkish comments from Fed officials helped the U.S. benchmark rally and global economic concerns helped push the dollar through parity against the euro again.
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