Interest Rate Parity

Interest Rate Parity

Last Updated by WikiWealth

Short Definition

Interest Rate Parity (International Fisher Affect): Higher interest rates draw in capital from low interest rate countries. The flow of money increases demand for the high interest rate country's currency. Higher demand creates higher-valued currencies.

WikiWealth uses this analysis to get an indication of value for a particular currency by taking the weight average return of individual country interest rate choices. If one country had a significantly high increase rate than the target country, money would flow from the low interest rate country to the high interest rate country. WikiWealth uses the global weighted average to calculate expect returns, because investors are likely to search a wide sample of countries for investment returns.

WikiWealth uses a 10 year interest rate for long term comparisons of interest rates. Countries with higher interest rates typically need them to control inflation, which destroys value and potential over time. The net potential of the inflation rate parity approach is much less, because low inflation (good for investors) usually matches countries with low interest rates (bad for investors).

Long Definition

Source: http://en.wikipedia.org/wiki/Interest_rate_parity