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Dr. Orrin Kuvalis

Nov 18, 2024

Although IRP tends to hold, it may not hold precisely all the time:

While the Interest Rate Parity (IRP) theory generally holds true, there are instances where it may not apply perfectly. What are the factors that can lead to deviations from IRP, and how can these deviations impact currency exchange rates in the short term?

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3 Answers

A
Anonymous

Jan 10, 2025

The correct option is D) both a and c.Explanation:Interest Rate Parity (IRP)  can be described as the arbitrage condition that must hold when equilibrium occurs in the in the international financial market. Arbitrage refers to the purchase and sale of financial assets such as securities, currency, or commodities, simultaneously in different markets or in forms of derivative forms with the aim of making profit from the differences in the prices of the same asset.In any market, IRP will always hold because that indicates equilibrium in the market.However, IRP may fail to hold all the time due to transactions costs, like the bid ask spread, and also due to capital controls imposed by governments. Whenever IRP does not hold, the exchange rates and interest rates would be brought back into line by the pressure from arbitrageurs.Based on the explanation above, the correct option is D) both a and c.
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A
Anonymous

Feb 10, 2025

you're crazy if you think that someone is going to write a 500 word report for you.
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Economics Business Management Banking

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Interest Rate Parity Currency Exchange Rates Financial Theories

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