Hey guys!!!
can anybody explain me the relationship between interest rate prevailing in a country and its currency value or exchange rate… 
If the interest rate in country A increases, country A’s currency will appreciate.
Suppose that currency A has a risk-free rate of 2% and currency B has a risk-free rate of 3%. Suddenly, currency A’s risk-free rate jumps to 5%. Everyone holding currency B will want to convert it to currency A (to get the higher interest rate); this drives up the price of currency A (relative to currency B): when there’s more demand, the price goes up.
Hi S2000,
Thank you for your explanation, it is very helpful!
One quick question for you that pertains to interest rate parity. Acording to this condition, if the risk-free rate on one currency is greater than the risk-free rate on another currency, the currency with the higher-risk free rate will trade at a forward discount relative to the other currency such that the benefit of the higher interest rate will be offset by a decline in the value of the currency.
Do you have a simple way to understand this? This most I can come up with is that If the price currency (numerator) has a higher rate, everyone will want to invest in that which will drive the pair exchange rate higher. To equalize this, the base currency must appreciate (so it is trading at a forward premium) and the price currency must depreciate (so it is trading at a forward discount). I am not sure that my thought process is correct here.
I usually think of it this way:
spot(A/B) × (1 + rA) / (1 + rB) = forward(A/B)
So, if rA > rB, then forward(A/B) > spot(A/B): B is trading at a forward premium, A is trading at a forward discount. It’s easy to remember because A is in the numerator in the spot rate, the forward rate, and the ratio of growth (interest rate) factors; B is in the denominator of all three.
It’s the same as what you wrote; this is just an easy for me to remember it.