PARITY CONDITIONS

There are three separate, but inter-related things:

1 Purchasing power parity.

This says that the exchange rate between two countries will change in the future depending on the relative inflation rates in the two countries in such a way as to keep the equivalent prices of goods the same. You can watch a full example of this in the lecture

2 The Fisher effect.

This says that inflation rates and interest rates move up and down together.

3 Interest rate parity.

This, in a sense follows on from the previous two. It says that the exchange rate between two countries will change in the future depending on the relative interest rates in the two countries.

The formulae for all three are given on the formula sheet.

You can find a lecture on the above, working through an example, on the following page:
https://opentuition.com/acca/f9/forecasting-foreign-currency-exchange-rates/
(It is in the F9 section because it is really revision from F9)

For forecasting exchange rates, inflation rates are thought to be a better predictor (certainly for the exam).

However, one big relevance of interest rate parity is that forward exchange rates are calculated based on relative interest rates (using the interest rate parity formula). This is explained in the lectures on the use of forward rate and money market hedging for dealing with foreign exchange risk.

The videos cannot be downloaded – they can only be watched online.
It is the only way that we can keep this website free of charge.

You should not need to install anything. If you ask on the technical support page then we should be able to find a way of sorting out your problem.

The link is: https://opentuition.com/support/

I hope that you do manage to view them.