Does economic theory fail when investors exploit interest rate gaps?
In short: Basic economic theory suggests that borrowing low-interest currencies to fund high-interest investments should not yield profit. This video explores why the reality in the City often contradicts these expectations regarding exchange rate depreciations.
Professor Jagjit Chadha examines the tension between Uncovered Interest Rate Parity and actual market behavior. According to standard theory, the differential between interest rates should be offset by expected changes in exchange rates, preventing arbitrage.
The lecture investigates whether financial funds generate profit by ignoring these theoretical constraints or if the theory itself fails to account for market realities.
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Sources
- Summary by Intellect · source: The Carry Trade and Uncovered Interest Rate Parity -Professor Jagjit Chadha
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