According to this theory, investors can not get the cost-effectiveness of high rates abroad than those realizable in the local market, because the difference between the interest rates are compensated by the difference between the exchange rate and the instantaneous forward rate, and the operations can be done as follows:
Investors can employ their money M in their local markets for a year, for example, and they get at the end of employment on M (1 + id) (where id interest rate) should have this amount is equal according to this theory, the amount of proceeds it when you convert the money into hard currency foreign exchange rate real-time (cash) and employ them in foreign markets and interest rate ie for resale so that it can get back on the amount of local currency, and can express it mathematically.
(1) M (1 + ID) = (1 + ie) 'CT
Where:
CC: real-time exchange rate (cash).
CT: forward rate.
ie: outside the nominal interest rate.
id: internal nominal interest rate.
Equation (1) can lead to:
(2)
Ask (1) on both sides of the equation (2) we get:
(3)
And we can write the equation as follows:
This theory allows linking the markets of national monetary exchange markets.
التسميات
Financial concepts