Hi Could somebody please confirm this. Whenever we want to compare price levels between countries the DC is the denominator. For all the other formulas ( PPP, IRP etc ( the DC is the numerator Is this correct? Thanks
Using direct quotes: Real rate = spot rate * (P fc)/(P dc)
yes using direct quotes. the only exeptlion is the price. For all the rest DC is always the numerator.
the general rule of thumb i use is that to make sure the currencies line up in the numerator when you are multiplying through. For instance, EUR:USD = 1.1854 and dollar risk-free rate is 3% and Euro risk-free rate is 4% and you have to determine the no-arb for a 1-year forward, simply line up the rate in the numerator with the USD risk-free rate (multiply the same currencies together) and then divide through by the EUR rate. $1.1854 * (1.03/1.04) = $1.174 Keep the currencies the same in the numerator and you should be fine. I think this always works, would love to know otherwise?!?!?