Forex interest rate can be defined as the amount of interest payable per period and seen as the proportion of the amount borrowed, lent or deposited by a forex trader. Forex interest rate is said to be the principal sum and the overall interest on a specific amount lent entirely depends on the principal sum, the compounding rate and the dimension in time at which the money was borrowed or deposited by the forex trader. Forex interest rate can also be defined as the amount of money loaned in which a forex trader (lender) charges as interest to another forex trader (the borrower) and is stated as annual percentage. It is also the rate at which the forex market banks charges to lend out its money to various forex traders.
THE REFLECTS OF FOREX INTEREST RATES
As stated in the theory of rational expectation in forex interest rates, borrowers and lenders have the ability to develop or generate expectation o0f inflation in the nearest future. The suitable nominal forex interest rates at which forex traders are disposed and able to borrow or lend money in the forex market include the real interest rate at which they are required to obtain or are willing and able to pay in addition to the rate of inflation the forex traders expect.
THE RISK INVOLVED
In terms of forex interest rates, the level of risk associated with the forex market trades will always be taken into consideration. A high risk investment in the forex market will always yield greater returns when compared to a more safe investments. With regards to this, the risk free nominal forex interest rate which is anticipated by the high risk forex investment is known as the risk premium. This particular risk premium a forex trader needs in a forex market trade hinge on on the risk preferences of the forex trader himself. Historical records holds that most forex lenders are risk averse.
Most forex traders that engages in forex interest rates prefer their money to be transacted in cash instead of a less fungible forex market trades or investments. The essence of cash at hand is to be used immediately when needed but some forex market trades and investments needs time/effort in other for the money to be converted into spendable forms and this principal is called the liquidity preferences. In forex interest rates, a 2 year old loan is seen to be more liquid than a 10 year old loan in the forex market.
In the forex market, the spreads of a forex interest rate is said to be the lending forex rate minus the deposit forex rate. This forex interest rate spreads insures the operating cost of the forex market banks who provides loans and deposits for forex traders. A negative forex interest rate spread is said to be where a deposit rate becomes higher than the lending rate.
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