interest rate parity redux a (slightly) different approach
DESCRIPTION
Interest Rate Parity Redux A (slightly) different approach. Return on domestic deposits (R) must equal return on foreign deposits measured in $ (1+R t ) = E e x {(1+R € ) / E t } or E t = {(1+R € ) / (1+R t )} x E e - PowerPoint PPT PresentationTRANSCRIPT
Interest Rate Parity ReduxA (slightly) different approach
Return on domestic deposits (R) must equal return on foreign deposits measured in $
(1+Rt) = Ee x {(1+R€) / Et }or
Et = {(1+R€) / (1+Rt)} x Ee
Where Et = spot exchange rate ($/€) consistent with interest rate
parity for given values of R€ and Ee
1 + R€ = gross return on foreign deposits
1 + Rt = gross return on domestic deposits right now
Ee = exchange rate ($/€) expected in future
Note the inverse relation between Et and Rt