International Arbitrage

Consideration is given in this chapter to empirical relationships between interest rates and forward exchange rates in different financial centres: Three-month forward premia and discounts of four currencies are shown in Charts 7.1 and 7.2. Each has experienced sharp fluctuations, associated with interest-rate movements and changing expectations about movements in the spot rate. Sterling was at a forward discount for most of the period after 1971, though, following a very sharp fall in U.K. interest rates, moved to a small premium towards the end of 1977 for the first time in close on six years.