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Unformatted text preview: 1 Review • International Fisher Effect (UIR parity) • Forward Rate Unbiased Condition F t,1 = E(S t+1 ) E(S $/€ )  S $/€ (i $  i € ) = S $/€ (1 + i € ) Bias in the Forward Rate E(S t+1 )  S t S t i $  i € (1+ i € ) 45 o d t = 0 = F t S t S t 2 Bias in the Forward Rate E(S t+1 )  S t S t i $  i € (1+ i € ) 45 o d t = 0 = F t S t S t Data suggest that investors demand a forward premium on the currency that is expected to depreciate! Bias in the Forward Rate E(S t+1 )  S t S t i $  i € (1+ i € ) 45 o d t = 0 = F t S t S t See Froot and Thaler on website 3 Summary of Parity Conditions • Purchasing power parity • Interest rate parity • Fisher effect • International Fisher effect • Forward rate as an unbiased predictor Summary of Parity Conditions • Purchasing power parity ∆ % in spot rates = ∆ % in relative expected inflation rates • Interest rate parity • Fisher effect • International Fisher effect • Forward rate as an unbiased predictor 4 Summary of Parity Conditions • Purchasing power parity ∆ % in spot rates = ∆ % in relative expected inflation rates • Interest rate parity ∆ % in national interest rates = forward discount / premium • Fisher effect • International Fisher effect • Forward rate as an unbiased predictor Summary of Parity Conditions • Purchasing power parity ∆ % in spot rates = ∆ % in relative expected inflation rates • Interest rate parity ∆ % in national interest rates = forward discount / premium • Fisher effect i = r + π e • International Fisher effect • Forward rate as an unbiased predictor 5 Summary of Parity Conditions • Purchasing power parity ∆ % in spot rates = ∆ % in relative expected inflation rates • Interest rate parity ∆ % in national interest rates = forward discount / premium...
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 Winter '08
 Chari
 Exchange Rate, Inflation, Interest Rates, Purchasing Power Parity, Forward contract, fisher effect

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