Interest rates and Exchange rates

The question of interest rate arises when currencies are borrowed or lent; whereas exchange rates are involved when different currencies are being bought or sold.

Exchange rates are subject to more frequent fluctuations than interest rates. Interest rate is a factor that affects exchange rates. High interest rates cause speculative capital to move between countries and thus affect exchange rates.

Interest rate differentials between two countries is a major factor in determining the forward exchange rates of the two currencies the currency of the higher interest rate country would be at a discount in terms of the lower interest rate country. Similarly, the currency of the lower interest rate country would be at a premium in terms of the higher interest rate country.

Difference Between Interest rate and Exchange rateInternational TradeInterest rates and Exchange rates The question of interest rate arises when currencies are borrowed or lent; whereas exchange rates are involved when different currencies are being bought or sold. Exchange rates are subject to more frequent fluctuations than interest rates. Interest rate is a factor that affects exchange rates. High...Capital Budgeting Techniques and Investment analysis