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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

Which statement about the international Fisher effect is correct?

The international Fisher effect states that the expected change in the spot rate reflects the nominal interest rate differential, with the higher-interest currency expected to depreciate, because real returns are assumed to equalise across countries.

  1. AThe expected change in the spot rate reflects the nominal interest rate differential between two countriesCorrect
  2. BForward rates are determined by the inflation differential between two countries
  3. CReal interest rates are expected to differ permanently across countries
  4. DThe forward rate is an unbiased predictor only if interest rates are equal

Explanation

The international Fisher effect says the currency with the higher nominal interest rate is expected to depreciate by approximately the interest differential, because real returns equalise. Forward rates depend on interest differentials, not inflation, and real rates are assumed to equalise.

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