Attached
Interest rates and exchange rates are
considered to be one of the most discussed areas under
International Finance. When considering the main
theories that explore on these two variables, Uncovered
Interest Rate Parity (UIP) states that the interest rate
differential is an unbiased predictor of the spot exchange
rate changes. The impact on investors' attitude is that
they would be indifferent towards the returns on
domestic and foreign assets denominated in same
currency thereby eliminating any short term arbitrage
profits. Studies based on the relationship between these
two variables are rare for developing countries like Sri
Lanka. Therefore in order to bridge that gap identified
through search for literature, this study is focused on
testing UIP for Sri Lanka. Thefindings reveal that there
is no evidence to prove the existence of UIP for the British
Pound and the Sri Lankan Rupee.
