Question
Arbitrage rule of thumb: If the difference in interest rates is greater than the forward premium (or expected change in the spot rate), invest in
Arbitrage rule of thumb:
If the difference in interest rates is greater than the forward
premium (or expected change in the spot rate), invest in the higher interest yielding currency. If the difference in interest rates is less than the forward premium (or expected
change in the spot rate), invest in the lower yielding currency.
My Question:
Sir/ Miss, I am confuse on how to calculate the difference in interest rate. I don't know when I should use US dollar minus foreign currency interest rate, or should use foreign currency to minus US dollar interest rate. May I have a detailed explanation and some examples of both situations?
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