* Deferred consumption When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.
* Inflationary expectations Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.
* Alternative investments The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.
* Risks of investment There is always a risk that the borrower will go bankrupt, abscond, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.
* Liquidity preference People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realise.
* Taxes Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.
Now, take HKD and USD as example The FX rate is at round 7.75, with flutations around it.
A drop in interest rate in US will lead to a higher interest rate in HK comparatively. HKD would become more attractive and thereby leads to a capital inflow from US to HK. There will be a BOP (balance of payment) surplus in HK, as a result of a rise in demand for HKD. Under the pegged exchange rate regime, the process of arbitrage will occur whenever there is BOP imbalance. The note-issuing banks will buy the USD and sell the HKD in exchange market, so as to capture the differential gain. The money supply in HK will rise during this process. As a result, the interest rate in HK will finally decrease.
One more point you can consider is inflation rate. Inflation rate difference between two currencies can also affect FX rate and interest rate.
辣椒仔
2010-04-06 19:21
嘩....你個份咁深的
辣椒仔
2010-04-06 19:23
引用第11樓kylau於2010-04-06 12:31發表的“”: Now, take HKD and USD as example The FX rate is at round 7.75, with flutations around it. .......
wow....
迪神
2010-04-06 19:52
引用第11樓kylau於2010-04-06 12:31發表的「」: Now, take HKD and USD as example The FX rate is at round 7.75, with flutations around it. .......
Poor US economy -> US govt have fiscal and monetary policy to increase money supply (to stimulate economy) -> money supply increases drops US interest rate
Remember, once the FX rate is pegged, the HK govt can do little on its fiscal and monetary policy, hence cannot control HK interest rate very much, but have to "follow" the pegged currency.
Given the value of x one period after the end of the sample, i.e. xT+1 we can predict the corresponding value of y, i.e. yT+1 .
yhatT+1 = b1 + b2 xT+1
It is interesting to evaluate the forecast error that we will be making: forecast error (f) = yhatT+1 - yT+1 = (b1- b1 ) +( b2 - b2 ) xT+1 - eT+1 It easily follows (from unbiasedness and assumption 2) that E(f) = 0 and can be shown that the variance of the forecast error is: Var(f) = s2 [1 + (1/T) + (xT+1-E(x))2/S( xt- E(x))2 ]
------------------------------- I've checked my CFA notes, it only quotes the formula for the variance of the forecast, without any proof.
