Pegasus2008

TDIGZ Wrote:
-------------------------------------------------------
> Can someone explain why interest rate parity in
> the economics book (CFAI) is different from the
> interest rate parity equation in the forwards
> reading? (both referring to currency)
>
> Economics says:
>
> F = S*[(1+Rfgn)/(1+Rdom)]
>
> Derivatives (Currency Forwards) says:
>
> F = S*[(1+Rdom)/(1+Rfgn)]
>
> WTF am I missing?


The way i treat it is I always use F = S*[(1+Rdom)/(1+Rfgn)].

In economics, if it's a direct quote $:UkPound then Ukpound is the home currency

If it's given as UkPound/$, convert it to direct and always use the currency to the right side of the dots as local and apply the same formula.

When applying the formula F = Spot x (1+rate uk) / (1+rate $)

Only one i recall where foreign is in numerator and local is denominator is nominal and real exchange rates where Real = Nominal x Price level f/Price level domestic

Try it and let me know if it works for you..