Attached
Interest rates and exchange rates are
considered to be one o f the m ost discussed areas
in International Finance. When considering the
m ain theories that explore on these two variables,
U ncovered Interest Rate Parity (UIP) states that
the interest rate differential is an unbiased
predictor o f the spot exchange rate changes. The
im pact on investors ’ attitude is that they w ould be
indifferent towards the returns on dom estic and
foreign assets denom inated in same currency
thereby elim inating any short term arbitrage
profits. Studies o f this nature are ofsignificance in
the case o f Sri Lanka, as a country which is trade
dependent accurate forecasts o f exchange rates
w ould be o f immense importance. H ow e this
study focuses on reviewing w hat is revealed by
literature so fa r and what is not
