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.
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?
Not necessarily.
Parity means equality. It doesn’t mean it’s arbitraged. Or even arbitrageable.
Generally not arbitrageable.
Arbitraged.
Not arbitraged.
Not arbitraged.
Generally not arbitrageable.
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