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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Four way equivalence theory
Hi sir, can you please explain this?
The Fisher formula shows how, in theory, interest rates and inflation rates move up and down together.
Purchasing power parity explains how, in theory, future spot exchange rates are determined by the relative inflation rates.
Interest rate parity explains how futures prices are determined by the relative interest rates.
In theory therefore the future spot rate should equal the forward rate.
I do explain each of these in my lectures.