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Uncovered Interest Rate Parity (UIRP)The difference in the nominal interest rates between two countries is equal to the relative changes in the foreign exchange rate over the same time period
Written by
CFI Team
Published October 28, 2023
Updated June 28, 2023
What is the Uncovered Interest Rate Parity (UIRP)?The Uncovered Interest Rate Parity (UIRP) is a financial theory that postulates that the difference in the nominal interest rates between two countries is equal to the relative changes in the foreign exchange rate over the same time period. It is quite similar to an economic theory called the “Law of One Price (LOOP).” It is similar in the sense that UIRP also claims that the price of an identical commodity, financial security, etc. anywhere around the world should have the same price when currency exchange rates are taken into consideration, regardless of its location in the world.
The uncovered interest rate parity ensures that an investor gains no excess return by relative changes or differences in foreign exchange rates. It does so by assuming that the country with the higher interest rate will experience depreciation in its domestic currency value relative to the foreign currency value with the lower interest rate.
Summary
The Uncovered Interest Rate Parity (UIRP) is a financial theory that postulates that the difference in the nominal interest rates between two countries equals the relative changes in the foreign exchange rate over the same time period.
Without interest rate parity, it would be very easy for banks and investors to exploit differences in currency rates and make profits.
UIRP works by assuming that the country with the higher interest rate will experience depreciation in its domestic currency value relative to the foreign currency value with the lower interest rate.
Formula for Uncovered Interest Rate Parity (UIRP)Where:
Et[espot(t + k)]
is the expected value of the spot exchange rate
espot(t + k), k periods from now. No arbitrage dictates that this must be equal to the forward exchange rate at time t
k is number of periods in the future from time t
espot(t) is the current spot exchange rate
iDomestic is the interest rate in the country/currency under consideration
iForeign is the interest rate in another country/ currency under consideration. In the equation of the uncovered interest rate parity mentioned above, the forward exchange rate is the future exchange rate. They are available with banks and foreign-exchange dealers.
Assumptions of UIRP
Capital mobility in the market: The uncovered interest rate parity assumes perfect capital mobility in the market.
Non-arbitrage condition: UIRP follows a no-arbitrage condition in the UIRP equation. If the condition is violated, a risk-free return exists, and an opportunity to make a risk-free profit unfolds.
Limitations of UIRP
Expected rate of depreciation: Empirical evidence concludes that the expected rate of depreciation, which plays a crucial role in uncovered interest rate parity, is often less than the difference that needs to be adjusted. Such a limitation often hampers the efficient working of the uncovered interest rate parity equation.
Practical ExampleAssume the nominal interest rate in the US is 6% per annum, and the nominal interest rate in India is 14% per annum. Since the nominal interest rate in India is higher, the investor will perceive it to be beneficial to borrow in USD and invest that in INR, and then reconvert the investment proceeds to USD to make a profit from the difference.
Say, for example, the investor borrows USD1,800 and converts it in INR at a spot rate of INR70/USD. Hence, he would need to repay USD1,860 after a year. Hence, he invests INR126,000 at a rate of 14% per annum. Hence, by the end of the year, he will receive INR143,640.
Now, when he tries to reconvert the investment proceeds back to USD, the uncovered interest rate parity condition will come into play, and the nominal interest rate difference will rise in order to eliminate the difference. The investor will then neither be better off nor worse off and will not make any profit as the difference in interest rates will be adjusted according to the no-arbitrage condition of UIRP.
Covered Interest Rate Parity vs. Uncovered Interest Rate Parity 1. Future ratesCovered interest rate parity involves the use of future rates or forward rates when assessing exchange rates, which also makes potential hedging possible. However, uncovered interest rate parity takes into account expected rates, which basically implies forecasting future interest rates. Hence, it involves the use of an estimation of the expected future rate and not the actual forward rate.
2. Difference in exchange ratesHowever, the uncovered interest for parity adjusts the difference between interest rates by equating the difference to the domestic currency’s expected rate of depreciation. It is because, in an uncovered interest rate parity condition, investors do not benefit from any forward cover.
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Mortgage Rate Lock Float Down
Mortgage Rate Lock Float Down
A mortgage rate lock that gives the borrower the option to reduce the interest rate on their mortgage if the market interest rates fall during a specified period
Written by
CFI Team
Published July 16, 2023
Updated July 7, 2023
What is a Mortgage Rate Lock Float Down? Mortgage Rate Lock Float Down StructureHere are the basic mechanics behind a mortgage rate lock float down:
1. The lender provides a baseline for how much rates must fall 2. Integrated renegotiation feeSome lenders will charge a loan percentage amount for the float down option. For example, a lender may charge an individual 1% on a $500,000 loan to exercise the float down option. If the individual opts to exercise the float down option, they would need to pay an additional $5,000 (1% of $500,000) to the lending institution.
3. No change to mortgage lock expiration dateA borrower is required to either exercise or void the float down option before closing. Many lenders make it explicitly clear that they are not able to extend the lock period for the float down, even if your closing date is extended.
4. You must ask the lender for a float downThe float down option is not automatically executed. A borrower must request the option be exercised, whether in person, over the phone, or through email.
5. Prior conditional loan approval may be requiredSome lenders require that a borrower received approval on a previous loan to acquire the float down option. Also, a lender will usually reserve the right to review a borrower’s credit, income, and assets before assigning the float down option.
Advantages of a Mortgage Rate Lock Float Down 1. Advantages of falling ratesA float down option provides the opportunity for a borrower to effectively low their mortgage costs if rates fall.
2. Protection from rising ratesIf mortgage rates rise, a mortgage rate lock float down will provide downside protection to the borrower.
Limitations of a Mortgage Rate Lock Float DownSome limitations of a mortgage rate lock float down include:
1. Payment is required even if it is unusedThe borrower will still be required to pay any fees associated with the float down option, even if they do not end up exercising it.
2. Speculative in nature Practical ExampleBelow are the terms of the borrower’s mortgage agreement:
Locked rate of 4.5% for 30 years.
The borrower must pay a fixed $1,000 fee to exercise the float down option.
The float down rate is set at 4.25%.
If, before closing, the mortgage rate falls to or below 4.25%, the individual will have the option to lock in the new lower rate. It may not sound like a large difference, but if the loan amount is $5,000,000, then it makes a huge difference:
$5,000,000 at 4.5% means an individual would need to pay $9,120,334 over the life of the loan.
$5,000,000 at 4.25% means an individual would need to pay $8,854,920 over the life of the loan.
More ResourcesCFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:
What Is The Drop Rate Of Doombringer In Diablo 4?
Diablo 4 is an action RPG that allows players to create characters according to their playstyles.
Furthermore, the game also features a selection of Unique items that can define your build for the rest of the playthrough of Diablo 4.
Doombringer is a unique two-handed Sword in Diablo 4 that boasts great stats that players desire and can define their builds after they obtain the Sword. However, unlike other unique items, Doombringer seems to have some of the lowest drop rates in the game.
Continue reading to learn where to find the Doombringer Sword and its stats.
What Is DoomBringer In Diablo 4?Doombringer is a unique Sword in Diablo 4. However, unlike other uniques which are class-specific, any class in the game can equip the Doombringer.
The Doombringer provides players with a chance on a lucky hit.
Here are the stats players can gain from equipping the DoomBringer Unique Sword;
Increased Critical Strike Damage
Increased Core Skill Damage
Lucky Hit: Chance To Heal
Increased Maximum Life
Unique Trait: Lucky Hit; Upto a [15-25%] chance to deal [X] Shadow Damage to surrounding enemies and reduce their damage done by 20% for 5 seconds.
The Unique trait and the Chance to heal makes this weapon one of the best items for players to obtain.
Especially if the players are playing a physical damage-based character.
Where Can You Find Doombringer In Diablo 4?Players can farm the Doombringer from dungeons in World Tier 4. Furthermore, these dungeons must be Level 85+ for the unique Sword to be droppable.
Additionally, some sources claim that players can target farm the Sword in the Champion’s Demise dungeon; however, the dungeon needs to be Level 85+.
Furthermore, the dungeon contains massive numbers of Goatmen, which can pose quite a bit of a threat to the players.
However, if you drop this unique item, the gander you took will be worth it.
A fair note is that for dungeons to be level 85+, the World Tier will be World Tier 4.
This means that most of the monsters you will meet will be very strong, and your chances of dying are significantly higher.
Continue reading to discover Diablo 4 Slow Crowd Control and ways to find Ghost Palm.
What Is The Drop Rate Of Doombringer In Diablo 4?Unfortunately, the Drop rate for the Doombringer Sword is abysmal; by Abysmal, we mean nearly 0.1% chance.
Furthermore, because of the Drop rate of the unique Sword, the community for Diablo 4 has voiced its dissatisfaction.
Additionally, Doombringer is not the Unique item with such drop rates; Blizzard recently showcased five more unique items with similar Drop rates.
However, players expect the Drop chances to increase in later patches. Only one player has obtained the Doombringer Sword in the entire game.
The Bottom LineUnique items can be build-defining for players; however, Blizzard’s approach to some unique items is rather upsetting.
This is mainly due to the items having insanely low drop rates.
But, shortly, Blizzard will likely increase the drop rate for these unique items.
Hopefully, this article can help you find the Doombringer Unique Sword and use it in your build in the world of Sanctuary.
Continue reading to discover the Monster Family Drops and Rage of Harrogath bugged in Diablo 4.
Bitcoin’s Decline Ignites Interest In Solana And Dogemiyagi: Top Crypto Investments
Bitcoin’s Record-Breaking Decline Sparks Interest in Solana and DogeMiyagi as Top Crypto Investments
When closely analysing the cryptocurrency market, where global investors are captivated by its potential, it becomes paramount to delve into the finest options for those seeking lucrative crypto investments. With recent data from CryptoQuant shedding light on a substantial decline in Bitcoin address inflows, it becomes apparent that investors are actively seeking alternative opportunities. Here, we step onto the stage to present you with the top investment choices: DogeMiyagi (MIYAGI) and Solana (SOL).
Record-breaking in Bitcoin AddressesAccording to CryptoQuant, Bitcoin has experienced an unprecedented decline in address logging inflows over 612 days. This is the largest drop in the history of Bitcoin. The analysis based on data from October 2023 reveals an 84% decline compared to the peak. These findings suggest a significant shift in Bitcoin’s holding and trading patterns, with long-term holders exhibiting a preference for self-custody wallets.
The change in supply dynamics can be attributed to various factors, including recent developments in the financial industry and regulatory frameworks introduced in leading markets, particularly within the G20. Major players like BlackRock have filed or re-filed for ETFs while regulatory initiatives have gained traction. It is worth noting that Bitcoin trading activity tends to surge during US market hours, and listing ETFs and regulatory frameworks closely correlates with Bitcoin’s price.
The ongoing debate surrounding the classification of cryptocurrencies remains a prominent topic within regulatory circles. Analysts have observed a substantial strengthening of Bitcoin’s price during US market hours, indicating a positive trend that has been consistent since November 2023. Despite a challenging period between mid-February and mid-June, Bitcoin has demonstrated a remarkable year-to-date climb of 62%, including a 13% increase over the past 30 days and a 1.5% rise in the weekly timeframe.
Solana: The Revolutionary AltcoinSolana is a leading altcoin with innovative blockchain technology, high scalability, and lightning-fast transaction speeds. Designed for decentralised applications and finance, Solana offers a reliable and efficient platform for developers and users.
Its unique consensus mechanism, Proof of History (PoH), combines Proof of Stake and Proof of Work, ensuring secure and fast transactions. This hybrid approach enables high transaction throughput, handling thousands of transactions per second, rivalling traditional financial systems.
DogeMiyagi: The Revolution of Meme MarketDogeMiyagi has gained substantial popularity in the crypto market, largely driven by its meme coin status and unique blend of utility and community-driven initiatives. Drawing inspiration from Dogecoin, DogeMiyagi embraces the viral nature of memes and leverages it to fuel its growth. Despite its playful origins, DogeMiyagi has established a solid reputation as a legitimate cryptocurrency with real-world use cases.
Solana and DogeMiyagi – Your Investment Insights AwaitUncovering the largest cryptocurrency’s challenges is complex, but it becomes evident that Bitcoin is not the sole titan in digital currencies. We unveil the cream of the crop. Having explored the depths of Solana and Dogemiyagi, queries may arise, but we stand ready with the answers you seek.
Should I Buy Solana Now? FOMO Alert: Discover the Next Big Thing in Meme Coins – DogeMiyagiThe analysis reveals significant shifts in Bitcoin’s holding and trading patterns, with long-term holders favouring self-custody wallets. Recent developments in the financial industry and regulatory frameworks have contributed to this transformation. Amidst these changes, Solana emerges as a revolutionary altcoin, offering cutting-edge technology, scalability, and low transaction fees. Meanwhile, DogeMiyagi is a meme coin with real-world utility and a vibrant community.
Explore exciting investment opportunities in cryptocurrencies with Solana or DogeMiyagi.
DogeMiyagi:In The ‘Interest Of Consumer Protection’, Binance And Ftx Make This Move
Two of the world’s largest cryptocurrency exchanges, Binance and FTX, recently announced limits on high-risk leverage trading on their platforms. Both companies cited consumer protection as the motive behind these restrictions.
The world’s largest crypto exchange, Binance, had announced earlier on 19 July that they were introducing a 20x leverage limit for new users. Now, as per a tweet by CEO Changpeng Zhao on Sunday, Binance Futures was preparing to apply the same limit for existing users soon.
.@binance futures started limiting new users to max 20x leverage last Monday, Jul 19th, 7 days ago. (We didn’t want to make this a thingy).
In the interest of Consumer Protection, we will apply this to existing users progressively over the next few weeks.
Stay #SAFU. 🙏
— CZ 🔶 Binance (@cz_binance) July 26, 2023
The futures trading platform, which was launched in 2023, had initially allowed investors to open leverage positions at a maximum limit of 20 times their investment. Only two months back, Binance Futures had announced that it will support BTC/USDT contracts for up to 125x margin, meaning that an investment of $100 could turn into a bet for $12,500.
The crypto billionaire cited the exchange’s efforts to “encourage responsible trading” as the reason behind this move. He elaborated on how even though leveraged trading was not a significant part of the exchange’s overall volume, it caused significant troubles with regard to volatility. Estimating that the average open margin position on FTX is leveraged by roughly 2x, he stated:
“We also don’t think it’s an important part of the crypto ecosystem, and in some cases, it’s not a healthy part of it… Again, this will hit a tiny fraction of activity on the platform, and while many users have expressed that they like having the option, very few use it. And it’s time, we think, to move on from it.”
Binance’s association with this high-risk trading is one of the main reasons behind regulators around the world issuing warnings. Since June, the exchange faced increased scrutiny from financial regulators in the US, Britain, the Cayman Islands, Hong Kong, Lithuania, Italy, Poland, and Thailand among others. Most of them have been critical of its high-leverage derivatives offerings. Amidst increasing regulatory scrutiny, Binance had also discontinued earlier this month, a new product line introduced this year, which offered stock tokens for companies like Tesla and Apple.
Another crypto exchange, Huobi global had made a similar move in mid-June limiting derivatives trading for its new and existing users. The exchange had dropped its allowable leverage from 125x to less than 5x citing the hostile regulatory environment in China.
While community reactions regarding these moves were mostly positive, some argued that the margin should be reduced further as the current limits continued to remain high risk. Nevertheless, users on Twitter appeared joyous about the announcements, while shunning high-risk trading as a bane to the crypto space.
Popular crypto analyst DonAlt expressed his respect for the move, tweeting:
Respect the hell out of that
No one needs a leverage casino, even the ones that think they do don’t.
— DonAlt (@CryptoDonAlt) July 25, 2023
Another analyst by the handle of Dark Crypto Lady thanked CZ for the move:
Thank you sir, this is a right thing to do because in my humble opinion, too many retail traders have no idea how leverage work and they often get rekt’d without understanding why.
Binance might take a small hit in the short run, but this is a win for everyone in the long run!
— 💎🙌🚀 Dark Crypto Lady 💎🙌🚀 (@DarkCryptoLord) July 26, 2023
Lastly, Anthony Pompliano made a prediction about other exchanges following suit, one of which unsurprisingly came true after Binance’s announcement.
FTX has decided to remove all leverage over 20x from their platform.
— Pomp 🌪 (@APompliano) July 25, 2023
Uncovered Interest Rate Parity (Uirp)
Uncovered Interest Rate Parity (UIRP)
The difference in the nominal interest rates between two countries is equal to the relative changes in the foreign exchange rate over the same time period
Written by
CFI Team
Published October 28, 2023
Updated June 28, 2023
What is the Uncovered Interest Rate Parity (UIRP)?The Uncovered Interest Rate Parity (UIRP) is a financial theory that postulates that the difference in the nominal interest rates between two countries is equal to the relative changes in the foreign exchange rate over the same time period. It is quite similar to an economic theory called the “Law of One Price (LOOP).” It is similar in the sense that UIRP also claims that the price of an identical commodity, financial security, etc. anywhere around the world should have the same price when currency exchange rates are taken into consideration, regardless of its location in the world.
The uncovered interest rate parity ensures that an investor gains no excess return by relative changes or differences in foreign exchange rates. It does so by assuming that the country with the higher interest rate will experience depreciation in its domestic currency value relative to the foreign currency value with the lower interest rate.
Summary
The Uncovered Interest Rate Parity (UIRP) is a financial theory that postulates that the difference in the nominal interest rates between two countries equals the relative changes in the foreign exchange rate over the same time period.
Without interest rate parity, it would be very easy for banks and investors to exploit differences in currency rates and make profits.
UIRP works by assuming that the country with the higher interest rate will experience depreciation in its domestic currency value relative to the foreign currency value with the lower interest rate.
Formula for Uncovered Interest Rate Parity (UIRP)Where:
Et[espot(t + k)]
is the expected value of the spot exchange rate
espot(t + k), k periods from now. No arbitrage dictates that this must be equal to the forward exchange rate at time t
k is number of periods in the future from time t
espot(t) is the current spot exchange rate
iDomestic is the interest rate in the country/currency under consideration
iForeign is the interest rate in another country/ currency under consideration. In the equation of the uncovered interest rate parity mentioned above, the forward exchange rate is the future exchange rate. They are available with banks and foreign-exchange dealers.
Assumptions of UIRP
Capital mobility in the market: The uncovered interest rate parity assumes perfect capital mobility in the market.
Non-arbitrage condition: UIRP follows a no-arbitrage condition in the UIRP equation. If the condition is violated, a risk-free return exists, and an opportunity to make a risk-free profit unfolds.
Limitations of UIRP
Expected rate of depreciation: Empirical evidence concludes that the expected rate of depreciation, which plays a crucial role in uncovered interest rate parity, is often less than the difference that needs to be adjusted. Such a limitation often hampers the efficient working of the uncovered interest rate parity equation.
Practical ExampleAssume the nominal interest rate in the US is 6% per annum, and the nominal interest rate in India is 14% per annum. Since the nominal interest rate in India is higher, the investor will perceive it to be beneficial to borrow in USD and invest that in INR, and then reconvert the investment proceeds to USD to make a profit from the difference.
Say, for example, the investor borrows USD1,800 and converts it in INR at a spot rate of INR70/USD. Hence, he would need to repay USD1,860 after a year. Hence, he invests INR126,000 at a rate of 14% per annum. Hence, by the end of the year, he will receive INR143,640.
Now, when he tries to reconvert the investment proceeds back to USD, the uncovered interest rate parity condition will come into play, and the nominal interest rate difference will rise in order to eliminate the difference. The investor will then neither be better off nor worse off and will not make any profit as the difference in interest rates will be adjusted according to the no-arbitrage condition of UIRP.
Covered Interest Rate Parity vs. Uncovered Interest Rate Parity 1. Future ratesCovered interest rate parity involves the use of future rates or forward rates when assessing exchange rates, which also makes potential hedging possible. However, uncovered interest rate parity takes into account expected rates, which basically implies forecasting future interest rates. Hence, it involves the use of an estimation of the expected future rate and not the actual forward rate.
2. Difference in exchange ratesHowever, the uncovered interest for parity adjusts the difference between interest rates by equating the difference to the domestic currency’s expected rate of depreciation. It is because, in an uncovered interest rate parity condition, investors do not benefit from any forward cover.
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