Rate parity Flashcards
1
Q
What does interest rate parity state?
A
It states that the difference between the spot and forward rate can be predicted by the difference in interest rates of two countries.
2
Q
Formula for interest rate parity & Purchase power Parity?
A
pro rated Avg Spot rate x (1 + pro rated Avg Foreign interest rate)/(1 + pro rated Avg Domestic interest rate)
3
Q
What is purchasing power parity
A
Theory that in the long-term, exchange rates between currencies will tend to reflect the relative purchasing power of each country.
