Four-way equivalence — Accounting glossary

Four-way equivalence connects the Fisher relationship between nominal interest and inflation, purchasing power parity between inflation and expected exchange rates, interest rate parity between interest rates and forward rates, and the expectations relationship between forward and expected future spot rates. The relationships require assumptions such as compatible periods and risk conditions; observed markets need not satisfy all of them exactly. Covered interest parity concerns a contracted forward hedge, whereas an expected future spot rate is a forecast. One cannot infer a guaranteed future spot rate from a forward quote merely because a model links them.

Worked example

If two currencies have equal real interest rates and the first has higher expected inflation, the simplified framework links its higher nominal interest rate to an expected depreciation and a forward discount. The result depends on the model's assumptions and quote direction.

Common mistake

Treating a forward contract rate as a guaranteed prediction of the future spot rate, or applying a parity formula without identifying currency units and period.

Where it appears in your exams

Qualification	Exam	Relationship	Period
ACCA	AFM	Supporting	September 2026–June 2027
ACCA	FM	Direct	September 2026–June 2027