Currency return related questions power, interest, different, currency, discount

former

Hello,

What are different currency return related questions? Please keep on adding your thoughts that you think are imp to tackle these questions.

1) Foreign currency forward
fwd premium or discount = (forward rate/spot rate -1) x (360/term in days)

2)Relative Purchasing power parity
Countries with high inflation rates should see their currency depreciating.

So x [ (1+ Idc) / (1 + Ifc) ]^t = Estimated spot rate (at t)


3) International Fisher Relation
Assumption - Real interest rates are equal across the borders. Therefore interest differencial equals to expected inflation differential.

(1 + rdc)/ (1 +rfc) = [1 + E(Idc)] / [1 + E(Ifc)]


4) Interest rate parity
Countries with high nominal interest rates (inflation + real rate) will have their currencies sell at forward discount.

F/S = (1+rdc) / (1 + dfc)

chandsingh

Currency futures
3 way arbitrage