1. avatar says

    I might have missed it on the video, but did you say you were going to explain why the interest rate parity formula starts with F0, as opposed to F1, like with the purchasing power formula? My curiosity is getting the better of me!

    Thanks for your help.

    • Profile photo of John Moffat says

      It is more of a Paper P4 thing (both papers use the same formula sheet), but the reason is that when the banks quote forward rates (covered in the chapter/lectures on foreign exchange risk) they do not just ‘guess’ a rate but they calculate it based on the interest rates.

      So….Fo is the forward rate that they quote now.

      (If forward rates do not mean much to you then read my answer again when you have covered foreign exchange risk management :-) )

      • avatar says

        Thanks for explaining that for me. I’m working through your lectures bit by bit, so I’m sure when I’ve covered foreign exchange risk I’ll understand your answer more fully!

    • Profile photo of John Moffat says

      @annchen, It is impossible to forecast future exchange rates, whatever factors you try and take into account.

      Inflation and interest rates are two factors that can be measured and at least give an indication. How would you go about trying to measure other factors?
      Anyway there is not exactly very much to learn since the formulae are given on the formula sheet :-)

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