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This Concept Map, created with IHMC CmapTools, has information related to: Final Revision, Covered Interest Parity (1+i) = F (1 + i*) - S yields Forward margin/ forward spread (interest rate differential) f = i - i*, Covered Arbitrage Domestic Covered Arbitrage n = S (1 + i) - (1+i*) - F, Uncovered Interest Parity definition At equilibrium, the expected % change in Spot rate is equal to the interest rate differential between the two countries. (Links interest rates, spot and future spot rates), Real Exchange Rate Q = S(d/f) P* --------- P real exchange rate with parity Real Exchange rate with PPP Q = SP* = 1 ---- P, Covered Arbitrage derived from Covered Interest Parity (1+i) = F (1 + i*) - S, Forward margin/ forward spread (interest rate differential) f = i - i* similar if parity holds Forward Margin / Forward spread f = F(x/y) - S(x/y) * 12 * 100 ---------------- ----- S(x/y) N, This is the change in price levels or difference in inflation (that is determining the change in spot rate of foreign currency) change in P/P* Relative PPP . ~ . . S = P - P*, ~ . r = i - P know as Fisher Equation, Uncovered Interest Parity Similar Similar to CIP, except forward rate is not taken and is subjected to market risk with Expected Spot rate or Se f would be replaced by S dot, Covered Interest Parity (1+i) = F (1 + i*) - S definition At equilibrium, the forward margin is equal to the interest rate differential between the two countries. (Links interest rates, spot and forward rates), Absolute PPP (Purchasing Power Parity) P = SP* parity with real exchange rate Real Exchange rate with PPP Q = SP* = 1 ---- P, Nominal Interest rate (i) = $(1+i) Real Interest Rate (r) Measures interest rate in terms of goods (It is adjusted for price levels) 1 + r = Po (1+i) ---------- P1 relation between real and nominal interest rate ~ . r = i - P, Covered Arbitrage Foreign Covered Arbitrage n = F (1 + i*) - (1+i) - S