Home » Archive

Interest Rates Explained

Currency Valuation and Further FX Strategy, Foreign Exchange (FOREX, FX), Currency Markets Strategy, Interest Rate Swaps, Interest Rates Explained »

The original motivation for the participation in an interest rate swap was for the two parties to reduce their borrowing costs. This was achieved by both parties borrowing in the market which they has a comparative advantage in their cost of borrowing. They would then swap their interest rate commitments at a rate beneficial to both parties and for a specified period. However, as international markets became more integrated and informationally more efficient, scope for the arbitraging interest rate differentials between borrowers in different markets reduced significantly. Rather than the …

Interest Rates Explained »

In forming a view on the future course of interest rates, it is necessary to recognise that changes in monetary policy interest rate settings are likely to affect the state of the economy, which in turn affects interest rates generally. For example, when a policy-induced increase in interest rates causes a reduction in the pace of economic growth, the demand for funds begins to decline and the rate of interest begins to ease. Furthermore, there is likely to be an accompanying reduction in the rate of inflation, thus causing interest …