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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › interest rate parity vs. purchasing power parity
Dear John,
can you please explain when calculating forward exchange rate, when should I use interest rate parity and when calculate using purchasing power parity?
Home country – Interest rate 3% per year,
Foreign country – Interest rate 7% per year,
Home country – Inflation 2% per year,
Foreign country – Inflation 5% per year,
Spot rate 20.00 Dinar per $
many thanks indeed!
Forward rates are calculated using interest rate parity.
Future spot rates are estimated using purchasing power parity.
I do suggest that you watch my lectures on both of these because I do explain (with examples) and explain why 🙂
thank you for a quick reply
You are very welcome 🙂