Consider the following about Hot Money:
1. Hot money will flow from high interest rate yielding countries into low interest rates countries
2. These financial transfers generally have no effect on the exchange rate
3. Hot money can affect Balance of Payment position of a country.
Which of the statements mentioned above is/are correct?
Explanation:
1st and 2nd statements are incorrect.
Hot money is currency that moves regularly, and quickly, between financial markets so investors ensure they are getting the highest short-term interest rates available. Hot money continuously shifts from countries with low interest rates to those with higher rates; these financial transfers affect the exchange rate if there is a high sum and also potentially impact a country’s balance of payments. Hot money can also refer to money that has been stolen but is specially marked so it can be traced and identified.