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    Week 8 Discussion - AA

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    ANJALI ARORA
    The document discusses the Interest Parity relationship and the conditions under which it holds true. It asks what parity means in the Interest Parity equation (equal currency exchange and interest rates between countries) and under what capital mobility condition the Interest Parity relationship is valid (perfect capital mobility, as capital can move freely without cost and domestic/foreign assets are perfectly substitutable, while imperfect mobility invalidates it due to different transaction costs across countries).

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    Week 8 Discussion - AA

    Uploaded by

    ANJALI ARORA
    6 views1 page
    The document discusses the Interest Parity relationship and the conditions under which it holds true. It asks what parity means in the Interest Parity equation (equal currency exchange and interest rates between countries) and under what capital mobility condition the Interest Parity relationship is valid (perfect capital mobility, as capital can move freely without cost and domestic/foreign assets are perfectly substitutable, while imperfect mobility invalidates it due to different transaction costs across countries).

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    Week 8 Discussion_AA

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    The document discusses the Interest Parity relationship and the conditions under which it holds true. It asks what parity means in the Interest Parity equation (equal currency exchange and interest rates between countries) and under what capital mobility condition the Interest Parity relationship is valid (perfect capital mobility, as capital can move freely without cost and domestic/foreign assets are perfectly substitutable, while imperfect mobility invalidates it due to different transaction costs across countries).

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    6 views1 page

    Week 8 Discussion - AA

    Uploaded by

    ANJALI ARORA
    The document discusses the Interest Parity relationship and the conditions under which it holds true. It asks what parity means in the Interest Parity equation (equal currency exchange and interest rates between countries) and under what capital mobility condition the Interest Parity relationship is valid (perfect capital mobility, as capital can move freely without cost and domestic/foreign assets are perfectly substitutable, while imperfect mobility invalidates it due to different transaction costs across countries).

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    Week 8 Discussion

    (a) What does “parity” in the Interest Parity (equation) relationship (IP), discussed in
    Chapter 17, mean? Answer in TEN words.
    (b) Under what condition in the financial market – perfect (obstacle free ) capital mobility or
    imperfect (restricted) capital mobility- will the IP hold true? Why? Answer in 60
    WORDS.
    NO EQUATION IS REQUIRED.

    Answers:

    a) Currency exchange rate and interest rate of two countries are equal.
    b) IP holds true under perfect capital mobility as capital can move freely between two
    countries without any extra cost and domestic and foreign assets can substitute perfectly
    with each other. The IP does not true in imperfect capital mobility due to its dependency
    on exchange rates. As it doesn’t take into account the different transaction cost in
    different countries.

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