15-12-2012, 06:07 PM
Interest Rate Parity & Exchange Rate Determination Reasons for Deviations from Interest Rate Parity
1Interest Rate Parity.ppt (Size: 1.93 MB / Downloads: 123)
RBI sold net $485m in FX market in May
The Reserve Bank of India's dollar sales were higher in the foreign exchange spot market in May than in April, data from the central bank showed on Tuesday.
Source: Reuters
RBI sold net $485m in FX market in May
The Reserve Bank of India's dollar sales were higher in the foreign exchange spot market in May than in April, data from the central bank showed on Tuesday.
The Reserve Bank of India's (RBI) dollar sales were higher in the foreign exchange spot market in May than in April, data from the central bank showed on Tuesday.
The RBI sold USD 1.26 billion in May compared with USD 275 million in the previous month as it tried to rein in the rupee's slide, taking its total intervention in the spot market since the start of September to USD 22.23 billion.
RBI extends relaxation on FX forward contracts
The Reserve Bank of India has extended the flexibility of cancelling and re-booking of forward contracts with tenures of more than one year, for companies and exporters to hedge their forex transactions, a statement from the central bank said on Wednesday.
In December last year, the RBI had allowed this flexibility subject to certain conditions
Banks have mobilised more than $10 billion from overseas Indians through nonresident rupee deposit schemes since December when the Reserve Bank of India liberalised interest rates banks could offer on such deposits.
Interest Rate Parity Defined
IRP is an “no arbitrage” condition.
If IRP did not hold, then it would be possible for an astute trader to make unlimited amounts of money exploiting the arbitrage opportunity.
Since we don’t typically observe persistent arbitrage conditions, we can safely assume that IRP holds.
IRP and Covered Interest Arbitrage
A trader with $1,000 could invest in the U.S. at 3.00%, in one year his investment will be worth
$1,030 = $1,000 (1+ i$) = $1,000 (1.03)
Alternatively, this trader could
Exchange $1,000 for £500 at the prevailing spot rate,
Invest £500 for one year at i£ = 2.49%; earn £512.45
Translate £512.45 back into dollars at the forward rate F360($/£) = $2.01/£, the £512.45 will be worth $1,030.