For those that have the secret sauce, in the PM section on page 180 it discusses the Foreign Currency Risk Premium (FCRP) as FCRP = ([E(S1) - So] / So ) - (Rdc - Rfc) If interest rate parity holds, then: FCRP = [E(S1) - F] / So My question is, if interest rate parity holds then (Rdc - Rfc) = 0 so the FCRP should be: FCRP = [E(S1) - So] / So I don’t even understand where the F term came from in the secret sauce. I think the F is supposed to So. Am I correct?
deep2002 Wrote: > My question is, if interest rate parity holds then > (Rdc - Rfc) = 0 so the FCRP should be: interest parity: F = S0*(1+Rdc)/(1+Rfc) -> FCRP = (E(S1)-F)/S0
ah, thank you. I wish it explained it better than just dropping an F in there.