Hello, What are different currency return related questions? Please keep on adding your thoughts that you think are imp to tackle these questions. 1) Foreign currency forward fwd premium or discount = (forward rate/spot rate -1) x (360/term in days) 2)Relative Purchasing power parity Countries with high inflation rates should see their currency depreciating. So x [(1+ Idc) / (1 + Ifc)]^t = Estimated spot rate (at t) 3) International Fisher Relation Assumption - Real interest rates are equal across the borders. Therefore interest differencial equals to expected inflation differential. (1 + rdc)/ (1 +rfc) = [1 + E(Idc)] / [1 + E(Ifc)] 4) Interest rate parity Countries with high nominal interest rates (inflation + real rate) will have their currencies sell at forward discount. F/S = (1+rdc) / (1 + dfc)
Currency futures 3 way arbitrage