In: Economics
Assume that investors have a choice between purchasing foreign bonds or domestic bonds. Why does exchange rate volatility cause countries to attempt to keep their interest rates in line with the interest rates of other countries.
The investors have a choice between purchasing foreign bonds or
domestic bonds. In this case exchange rate volatility cause
countries to attempt to keep their interest rates in line with the
interest rates of other countries.
Investors are making the choices because of the following
reasons:
In the domestic bonds the fluctuation rate is very high in
comparison to the foreign bonds.
Domestic bonds are based on the local factors and in the foreign
bonds various global factors are responsible for the settlement of
the prices.
The stability in the foreign bonds is higher than the domestic
bonds.
The rate of growth is higher in the foreign bonds in comparison to
the domestic bonds.
The exchange rate volatility cause countries to attempt to keep
their interest rates in line with the interest rates to other
countries because of the following reasons:
The change in interest rate will change the expected returns for
the investors.
The change in interest rate is very important to maintain the
returns at the stable rate.