There are 2 countries:

  1. Country A Lending Rate is 4%, in a LR, interest rate is expected to remain constant
  2. Country B Lending Rate is 1% in Year 1 Q1, and there is persistent pressure to further depreciate the currency and interest rates in the following year. Assuming further depreciation of currency is expected for 2 years.

So if i reside in Country A, and I borrow a loan in Country B currency at floating rate at Year 1 Q1.

After 2 years, will I actually gain from this transaction? Will I be able to "save money"?

  • 1
    This is assuming you can get a loan from the other country. They are unlikely to lend when the collateral you are pledging against the loan is not in the same country as the lender. – mhoran_psprep Jun 28 '15 at 19:13
  • @mhoran_psprep For major currencies, you can almost always borrow in another currency: that's pretty much exactly what the FOREX market is all about (you buy foreign currency and sell local currency, and get the interest rate differential as "rollover"). However, as base64 points out: if you're sure Country B's currency will depreciate, you can make a lot more money through FOREX directly. – barrycarter Jul 3 '15 at 3:14

You are violating the Uncovered Interest Rate Parity.

If Country A has interest rate of 4% and Country B has interest rate of 1%, Country B's expected exchange rate must appreciate by 3% compared to spot. The "persistent pressure to further depreciate" doesn't magically occur by decree of the supreme leader. If there is room for risk free profit, the entire Country B would deposit their money at Country A, since Country A has higher interest rate and "appreciates" as you said. The entire Country A will also borrow their money at Country B.

The exception is Capital Control. Certain people are given the opportunity to get the risk free profit, and the others are prohibited from making those transactions, making UIP to not hold.

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