Relative Purchasing Power Parity (PPP)
et = e0
t
(
1 + ih )
×
(1 + i )
t
f
Real Exchange Rate
(1 + i f
P f
e t′ = e t t h = e t
Pt
(1 + i h
)
t
)t
Fisher Effect (FE)
ah = a f
⇒ (1 + a h ) = (1 + a f
⇒
(1 + rh ) = (1 + rf )
(1 + ih ) (1 + i f )
)
International Fisher Effect (IFE)
(1 + rh ) t
(1 + r )
t
=
f
et
e0
Forward % Premium/Discount (annualized)
Forward premium Fwd rate - Spot rate
360
=
×
(discount)
Spot rate
Fwd contract # of days
Interest Rate Parity (IRP)
(1 + rh ) t
(1 + r )
f
t
=
ft
e0
Unbiased Nature of Fwd Rate (UFR)
et = f t
