CA Final · Advanced Financial Management · International Financial Management
Which statement correctly describes the international Fisher effect?
The international Fisher effect states that the expected percentage change in the spot exchange rate is approximately equal to the difference between the nominal interest rates of the two countries, so the higher-rate currency is expected to depreciate.
- AThe expected change in spot rate equals the nominal interest rate differential between two countriesCorrect
- BForward rate always equals the future spot rate
- CReal interest rates differ permanently across countries
- DExchange rates are unaffected by interest rates
Explanation
The international Fisher effect says the currency with the higher nominal interest rate is expected to depreciate by about the interest differential. Forward equalling future spot is the unbiased expectations hypothesis, a different idea.
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