Correlation between spot and risk free rate

[afterworkguinness]

Hi,
When talking about correlations between spot and risk free rates in chapter 11, Jorion says "...Therefore higher values of the EUR are associated with lover EUR interest rates". This doesn't sound right to me. Am I missing something or lower a typo and it should have been higher ?

 

[ami44]

Hi,

Hi,
When talking about correlations between spot and risk free rates in chapter 11, Jorion says "...Therefore higher values of the EUR are associated with lover EUR interest rates". This doesn't sound right to me. Am I missing something or lower a typo and it should have been higher ?

A positive correlation of 0.13 is assumed between the EUR Spot and the long EUR bill. If the EUR Spot gets higher than also the price of the EUR bill increases, which means the EUR interest has been decreasing.

 

[ShaktiRathore]

Hi
Acc. To IRp Fc/Eur=F
Fo be initial value and F be value of Eur after time t
F=Fo*[(1+R(Fc))/(1+R(Eur))]^t now a lower R(Eur) i.e. Lower euro interest rate implies higher Euro values F(high Fc/Euro)(a lower denominator R(Eur) increases overall value F hence Euro) Therefore lower euro rates are usually associated with higher Euro values. Usually a lower interest rate makes currency appreciate that is high value in future.
Thanks