« Midterm 1 | Main | Logarithms »
September 28, 2006
Interest Rate Parity
Interest rate parity establishes a relation between the interest rates in two countries and the exchange rate between their currencies.
We first do a quick overview of arbitrage pricing.
It might be possible to generate arbitrage profits by trading in the two countries' bond markets.
The interest rate parity condition rules out these arbitrage profits.
Posted by bparke at September 28, 2006 02:20 AM