Hi John, Thank you for your wonderful lectures, could you please help me by telling where can i find the videos for Fishers effect and Interest rate parity 馃檪

Although they are summarised in Chapter 22 of the free lecture notes, they are covered in different lectures. The Fisher effect is relevant when calculating the nominal cost of capital and is explain in the lectures on investment appraisal with inflation. Interest rate parity is relevant for calculating forward exchange rates and is explained in the lectures on foreign exchange risk management.

Hey John, I was confused about a Question i came across in the specimen Exam on the ACCA website. In your lecture you have said always use the purchasing power rate but in their answer they have applied the interest rate parity formula. Hence what is to be done when both rates are mentioned? (this is question-1 of the specimen exam)

The home currency of Acaba Co is the dollar ($) and it trades with a company in a foreign country whose home currency is the Dinar. The following information is available:

I do not say to always use the purchasing power parity formula at all!

We use purchasing power parity when forecasting a future spot rate, but we always use the interest rate parity formula when calculating forward rates (as is asked for in this question). This is all explained in my lectures on managing foreign exchange risk.

Please ignore my last comment. After viewing the lecture, I now realise that the Fisher formula is relevant in this part of the course, as well as the investment appraisal section.

Am I right in saying the Fisher Formula is for calculating the real rate of inflation in investment appraisal, and is not relevant to this part of the course? Just checking, as per the message below.

Interest rate parity is not used to forecast spot rate – it is used to determine forward rates, and why this is the case is explained in my free lectures on forward rate and on money market hedging.

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shikhap1 says

Hi John. Thank you so much for making this concept so simple and precise. It was to the point and saved a lot of my time. 馃檪

John Moffat says

Thank you for your comment 馃檪

joakie says

Hi John, Thank you for your wonderful lectures, could you please help me by telling where can i find the videos for Fishers effect and Interest rate parity 馃檪

John Moffat says

Although they are summarised in Chapter 22 of the free lecture notes, they are covered in different lectures.

The Fisher effect is relevant when calculating the nominal cost of capital and is explain in the lectures on investment appraisal with inflation.

Interest rate parity is relevant for calculating forward exchange rates and is explained in the lectures on foreign exchange risk management.

visheshparyani says

Hey John,

I was confused about a Question i came across in the specimen Exam on the ACCA website. In your lecture you have said always use the purchasing power rate but in their answer they have applied the interest rate parity formula. Hence what is to be done when both rates are mentioned? (this is question-1 of the specimen exam)

The home currency of Acaba Co is the dollar ($) and it trades with a company in a foreign country whose home currency is the Dinar. The following information is available:

Spot rate

20.00 Dinar per $

Interest rate

3% per year Home country

7% per year Foreign country

Inflation rate

2% per year Home country

5% per year Foreign country

What is the six-month forward exchange rate?

20.39 Dinar per $

20.30 Dinar per $

20.59 Dinar per $

20.78 Dinar per $

Answer- 20 x (1路035/1路015) = 20路39 Dinar per $

John Moffat says

I do not say to always use the purchasing power parity formula at all!

We use purchasing power parity when forecasting a future spot rate, but we always use the interest rate parity formula when calculating forward rates (as is asked for in this question). This is all explained in my lectures on managing foreign exchange risk.

visheshparyani says

Oh, I’m sorry. Thank you for clearing my confusion and the quick reply 馃檪

John Moffat says

You are welcome 馃檪

cbennett says

Please ignore my last comment. After viewing the lecture, I now realise that the Fisher formula is relevant in this part of the course, as well as the investment appraisal section.

cbennett says

Am I right in saying the Fisher Formula is for calculating the real rate of inflation in investment appraisal, and is not relevant to this part of the course? Just checking, as per the message below.

muxa says

In lecture notes there are The fisher effect and interest rate parity.

Where are can find videos regarding them?

muxa says

found it

John Moffat says

Good 馃檪

soheb20092 says

which lecture is the video, care to share?

karts2010 says

where is the lecture notes for fishers effect and interest rate parity

John Moffat says

Chapter 22 of our free lecture notes and the free lectures that go with them.

tasmeya says

In Interest Rate Parity, why does country having lower interest rate become stronger and higher interest rate become weaker?

John Moffat says

Interest rate parity is not used to forecast spot rate – it is used to determine forward rates, and why this is the case is explained in my free lectures on forward rate and on money market hedging.

anusha1995 says

In example 2, how do we say that yen is stronger and pound is weaker?

John Moffat says

Because one pound buys fewer yen.