Introduction 📜

1. Interest rate parity (IRP) is a concept in international finance that states that the difference in interest rates between two countries should be equal to the difference in expected currency appreciation or depreciation.

2. IRP is used to evaluate the relative value of different currencies and to determine the theoretical forward exchange rate between two currencies.

Importance 💼

1. IRP is important for international investors, companies, and financial institutions to evaluate the relative value of different currencies and to make investment and borrowing decisions.

2. IRP is also used to determine the theoretical forward exchange rate between two currencies, which can be used to hedge against currency risk.

Common Interview Questions 💬

1. What is interest rate parity?

2. How is interest rate parity used to evaluate the relative value of different currencies?

3. How is interest rate parity used to determine the theoretical forward exchange rate between two currencies?

4. What are some of the advantages and disadvantages of using interest rate parity?

Advantages 💡

1. IRP helps international investors, companies, and financial institutions to evaluate the relative value of different currencies and to make investment and borrowing decisions.

2. IRP can be used to determine the theoretical forward exchange rate between two currencies, which can be used to hedge against currency risk.

3. IRP can also be used to evaluate the relative attractiveness of different countries for investment and borrowing.

Disadvantages 🚫

1. IRP assumes that markets are perfectly efficient and that there are no transaction costs or barriers to capital flows, which may not always be the case in the real world.

2. IRP also assumes that the interest rate differential between two countries will remain constant, which may not always be the case.

3. IRP may not always be useful in practice, as it is based on theoretical assumptions that may not always hold in the real world.

Conclusion 🔚

1. Interest rate parity is a concept in international finance that states that the difference in interest rates between two countries should be equal to the difference in expected currency appreciation or depreciation.

2. IRP is used to evaluate the relative value of different currencies and to determine the theoretical forward exchange rate between two currencies.

3. While IRP has advantages such as helping to evaluate the relative value of currencies and determine the forward exchange rate, it also has disadvantages such as assuming markets are perfectly efficient and that interest rate differentials will remain constant.