How Do Interest Rates and Exchange Rates Interact

This research aims to explore the relationship between interest rates and exchange rates from theoretical interactions to concrete linear relationships. Interest rate parity theory plays an important role in this topic, where forward discounts and forward premiums are discussed. What’s more, by analyzing the interest rate and exchange rate data of the countries using LIBOR, this study seeks changes in the correlation between interest rates and forward premium/discount before and after the cancellation of LIBOR. The reasons for switching from LIBOR to SOFR are also analyzed. The expected outcome includes, providing that how do interest rates and exchange rates interact, whether the removal of LIBOR has affected market efficiency.