IRPEP Meaning and
Definition
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IRPEP is an acronym that stands for Interest Rate Parity Expected Future Exchange Rate. It refers to a theory in international finance that describes the relationship between interest rates and exchange rates in different countries. According to IRPEP, the expected future exchange rate is determined by the difference in interest rates between two nations.
The underlying principle of IRPEP is that interest rate differentials between countries will lead to changes in the value of their currencies. Specifically, if there is a higher interest rate in one country compared to another, investors are more likely to invest in the higher yielding currency. This increased demand for the currency will result in its appreciation relative to the currency with a lower interest rate.
IRPEP assumes that free capital movement exists and that investors are rational and seek to maximize their returns. It also assumes that there are no restrictions on the flow of funds between countries, such as capital controls. Additionally, it assumes that transaction costs are negligible.
The theory suggests that interest rate differentials should create an equilibrium in the foreign exchange market, where expected future exchange rates will offset the interest rate differentials between countries. In other words, any gains or losses from investing in a higher interest rate currency will be offset by changes in the exchange rate. This equilibrium is important, as it helps prevent risk-free arbitrage opportunities across countries due to interest rate differentials.
Overall, IRPEP is a concept in international finance that explains the relationship between interest rates and exchange rates based on the notion of expected future exchange rates.
Common Misspellings for IRPEP
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