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sir i have doubt regarding IRPT and more specifically this sentence based on IRPT.
“The calculation of the forward rates based on the interest rate parity indicates that the MShs rates are depreciating against the Euro because the Mazabia base rates at 10.8% are higher than the European country’s local base rates at 2.2%”
In economics i have studied that the country in which interest rates are lower(here Europen country 2.2% vs. Mazabia’s 10.8%), the likelihood of inflation tends to be higher. And we know that if inflation is higher, the currency depreciates. So, i don’t understand why the formula is such that it gives an appreciating euro and depreciating MShs???
If the current exchange rate is MS per € 116
Then using PPP the exchange rate should go to 116 x 1.108/1.022 = 125.8 MS per €If a € buys more MS then the MS is depreciating in value.
I explain this in my free lectures on forecasting spot rates. However they are only a forecast. As I also explain in my free lectures on the managing of foreign exchange risk, forward rates are not a forecast – they are always determined by money market interest rates (in real life as well as in exams).
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