# Purchasing power parity and other crap

Absolute purchasing power parity
Relative purchasing power parity
International fisher relation
Covered Interest rate parity
Uncovered interest rate parity
Foreign exchange expectation relation

Did anyone master these? If you got good notes on these, please share.

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will prob see this stuff on the exam.. just remember general conceptions. The core concept in all of these is that FX relations are arbitraged

Parity = equal = arbitraged

Purchasing Power Parity - relates to price levels (so think of inflation)

Interest Rate Parity - relates to interest rates (nominal so think of interest rates)

Covered - hedge

Uncovered - unhedged

Expected - well you guested it expected rathers in the future

Fisher - you take macro econ in college? Irving Fisher was prob one of the greatest macroeconomist in the early 20th century after Keynes. He formulated the relationship between nominal rates, real rates, and inflation.

Absolute purchasing power parity: Exchange rate movement is related to price of a single product.

Relative purchasing power parity: Exchange rate movement is related to inflation rate (CPI).

International fisher relation: Interest rate differential relation to expected inflation rate differential.

Covered Interest rate parity: Forward Exchange rate relation to Interest rate differential.

Uncovered interest rate parity: Expected Exchange rate relation to Interest rate differential

Foreign exchange expectation relation: Forward Exchange rate relation to Expected Exchange rate movement.

I can’t think of a shorter short cut.

What are the fomulas for all of these, can someone who mastered these add?

BiPolarBoyBoston wrote:
will prob see this stuff on the exam.. just remember general conceptions. The core concept in all of these is that FX relations are arbitraged

Not necessarily.

BiPolarBoyBoston wrote:
Parity = equal = arbitraged

Parity means equality.  It doesn’t mean it’s arbitraged.  Or even arbitrageable.

BiPolarBoyBoston wrote:
Purchasing Power Parity - relates to price levels (so think of inflation)

Generally not arbitrageable.

BiPolarBoyBoston wrote:
Interest Rate Parity - relates to interest rates (nominal so think of interest rates)

Covered - hedge

Arbitraged.

BiPolarBoyBoston wrote:
Uncovered - unhedged

Not arbitraged.

BiPolarBoyBoston wrote:
Expected - well you guested it expected rathers in the future

Not arbitraged.

BiPolarBoyBoston wrote:
Fisher - you take macro econ in college? Irving Fisher was prob one of the greatest macroeconomist in the early 20th century after Keynes. He formulated the relationship between nominal rates, real rates, and inflation.

Generally not arbitrageable.

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