DC:FC interest rate difference one, different, into, difference, countries

dvilayphet

When we're asked to use interest rates for two different countries, when do we subtract one rate from the other vs. when do we devide one into the other?

benbenxiong

According to my understanding dividing/ multiplying is the exact method of Fisher Equation. Adding/ subtracting is the linear approximation.

Some questions are to use particular method explicitly. I personally prefer multiplying/ dividing. The difference is very small.

Note that if you multiply or divide use one plus rate, ie, (1+r), not r as in additions/subtractions.

Hope this help.

llxx

so when in doubt, divide. got it. thanks!