# Interest Rate Parity

Just got a bit agitated while studying, but it’s probably because I tried studying on Wednesday before Thanksgiving. Interest rate parity is specified in the CFAI text as Future Exchange Rate = Spot Exchange Rate (1 + Interest Rate of Foreign Country)/ (1+ Interest Rate of Domestic Country) BUT the Schweser notes have the inverse of the quotient, Domestic Rate is the numerator. I think the confusion for me at least is what is the domestic currency in something like €: €: is directly stated in dollars since it shows how much a Euro will cost. So are dollars the domestic currency? Any further guidance and help would greatly be appreciated to clear this up. Thanks, M

Keep yourself in the direct quote Domestic (DC)/Foreign (FC) In that convention, the Covered interest rate parity is Forward (DC/FC) = SPot (DC/FC) * (1+ r domestic) /(1+foreign) For me, FF = Spot* Domestic Remember F go together.

Using the €: convention, dollars are the foreign currency. If €: was 1.25, it’s saying 1.25 is equal to €1. I find it easier to convert to /€ notation and go from there. Flip the symbols and the number always goes on top.

Thanks, This makes sense and would account for the reversal. Still, I’m somewhat uneasy that there may not be consistency between CFAI text and Schweser.