A fund engages in currency speculation for its clients. If the fund wants to relate interest and inflation rate differentials to expected exchange rate movements, the method that they should use is: A) international Fisher relation. B) uncovered interest rate parity. C) covered interest rate parity.
intl fisher.
you also need to memorize them. anyone else?
Agree with Intnl Fisher.
all 3 of us need to memorize these. anyone else?
international is the iii’s. inflation interest international
B
B
It is poorly worded question. I know people have made mistakes by just seeing interest and inflation which leads to fisher but question is asking differential and exchange rate which is uncovered IRP
WINNER! Your answer: A was incorrect. The correct answer was B) uncovered interest rate parity. Combining PPP and the international Fisher relation results in the theory of uncovered interest rate parity, which links spot exchange rates, expected spot exchange rates, and nominal interest rates I need a quick and dirty way to remember these. i remember PPP because i think of 2 dirty words that start with P relating to body parts and then i think they like to EXCHANGE things and well, INFLATION kind of fits in there. so that works for me. but i need one for intl fisher and uncovered IRP apparently. i messed it up having not seen econ in a while.
interest - inflation -> Intl Fisher inflation - exchange rate -> relative PPP exchange rate - interest rate -> Uncovered IRP Interest rate - Forward discount/premium -> covered IRP exchange rate - forward discount / premium -> foreign exchange expectations.
Fisher = inflation and interest rate differential uncovered = interest rate differential and exchange rate movements
International Fisher remember the same as Skip with the 3 I’s. Always remember the normal Fisher as being the ghetto equation because Fisher couldn’t afford to go international. nom= (1+r) * (1 + infl) Covered Interest Rate parity I always equate with Cov. Int Arbitrage which has to do with DC and FC Interest Rates and FC and DC Spot and Forward rates.
ok International Fisher- I’s. inflation/interest. PPP i’m a perv and i remember it, exchange/inflation how to remember uncovered? hmm…if i can remember it combines intl fisher and PPP, i can cxl inflations out and get exchange and interest. SO MANY LITTLE THINGS TO REMEMBER AHHHHHHHHH!
F me. I thought it was Int. Fisher. Time to revisit econ.
i thought last year’s quant question was intl fisher also, but it was PPP. whoops. here we are again.