exchange rate risk reduces to inflation uncertainty if all parity relationship holds perfectly. according to the answer, this abovestatement is right, I was wondering why we can’t say exchange rate risk reduces to interest rate uncertainty if all parity relationship holds perfectly???

cause considering inflation and exchange rate- excluding them should result in same interest rates

because real rates are the same (Fischer) -> uncertainty of nominal interest rates is identical to uncertainty of inflation

so to say exchange rate risk reduces to norminal interest rate uncertainty if all parity relationship holds perfect. this statement is correct as well? florinpop Wrote: ------------------------------------------------------- > cause considering inflation and exchange rate- > excluding them should result in same interest > rates

yes it would since inflation is variable then inflation + real interest= nominal interest would also be uncertain