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by darawk
2986 days ago
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> The formal model underlying the hypothesis is the uncovered Interest Rate Parity condition which states that in absence of a risk premium, arbitrage will ensure that the depreciation or appreciation of a country's currency vis-à-vis another will be equal to the nominal interest rate differential between them. Since under a peg, i.e. a fixed exchange rate, short of devaluation or abandonment of the fixed rate, the model implies that the two countries' nominal interest rates will be equalized. An example of which was the consequential devaluation of the Peso, that was pegged to the US dollar at 0.08, eventually depreciating by 46%. Stablecoins don't set their own monetary policy. The interest rate on a stablecoin will be set by the market, not a central bank. The interest rate here is the escape valve that allows the exchange rate to be fixed. The interest rate floats, the exchange rate remains constant. |
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Collateral rates have a practical cap, particularly in a time of broader financial crisis. This structure is identical to the "always redeemable" structured products from a few decades ago. There is zero innovation in the financial engineering, just the presentation.