International Finance Final Formula

Forward Expectations Parity (FEP)

relates the expected rate of change in the exchange rate (E[e]) : Theory stating that the forward premium or discountis equal to the expected change in the exchange rate between the countries

Purchasing Power Parity (PPP)

a theory stating that the exchange rate between currencies two countries should be equal to the ratio of the countries price levels of a commodity basket

Forward-PPP (FPPP)

assumes that PPP and FEP both hold, and relates exchange rates (F, S) to

Fisher Effect (FE)

relates expected inflation rates (pf, pd) to nominal interest rates (if, id): it describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals to the nominal interest rate minus the expected inflation rate.

Relative Purchasing Power Parity (PPP)

relates the expected rate of change in the exchange rate

Interest Rate Parity (IRP)

relates exchange rates (F, S) to nominal interest rates (if, id): in arbitrage equilibrium condition holding that the interest rate differential between two countries should be equal to the forward exchange premium or discount. Violation of IRP gives rise to profitable arbitrage opportunities.

International Fisher Effect (IFE)

relates the expected rate of change in the exchange rate (E[e]) to: is the theory stating that the expected a change in the spot exchange rate between two countries is the difference in the interest rates between the two countries