bdavi77962

CFA Rythm - An easier approach to PPP formula is:

Check the F or Spot rate- Say its Ccy A/Ccy B. In this case use F = S* (1+ A inflation rate)/(1+ B inflation rate), i.e. use the inflation rates in numerator and denominator same as the Spot or fwd rates provided.


e.g. Spot rate is in CAD/USD, now when you use the formula use CAD infl. rates in Numerator and USD infl. rates in Denominator.

The logic is that - Inflation is Inversely related to Exchange rate (i.e. A per B is directly related to Inflation).

So If inflation in A is higher then No. of A you can buy per B is higher => Fwd A/B is higher

so S* higher/lower.

I hope that helps.



Edited 1 time(s). Last edit at Saturday, April 24, 2010 at 02:43PM by SidL1.