Wednesday, July 23: 4th Day of Class

Today, we began discussions of various ways to determine whether or not a market is efficient by reviewing Interest Rate Parity, Purchasing Power Parity, and the Fisher Effect. We learned how to take advantage of an inefficient market by using covered interest arbitrage and uncovered interest arbitrage. While reviewing interest rates, we studied how interest rates not only effect inflation but also directly relate to the depreciation of currencies.

For instance: When the Federal Reserve lowered interest rates earlier in the year, they inevitably setup the dollar to depreciate. They made the market borrower friendly since they would be able to borrow money at a lower interest rate. However, they harmed the investment portion of the loans. Investors are not getting good enough returns from the interest rates offered, so they are taking their money to other countries. Currently, an investor would profit greatly to convert their currency to dollars, borrow money in the U.S. at a lower interest rate, and invest in a country that is offering more friendly rates. Therefore, we are losing foreign investors (and their capital) to other countries.