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Dear John,,
Please clarify when we use one and not the other.
In a question, given both interest and inflation rates for home and foreign currency.
What determines whether we use IRP or PPP.
If question is Forward exchange rate – always IRP?
If so when do we use PPP?
Also please confirm if foreign currency is always counter and homes currency is always base rate in Future rate calculation?
Many thanks
Dear John,
I now understand that for Forward exchange rates we use IRP.
Please confirm the circumstances we would use PPP?
And also please confirm if foreign currency is always counter and homes currency is always base rate in Future rate calculation?
Many thanks
Forward rates are always determined using interest rate parity.
If forecasting future spot rates, the purchasing power parity is better.
The ‘base’ currency when using the formulae is the currency that is being quoted against.
So is the exchange rate is quoted as $’s per Euro, then euro is the ‘base’ currency. If the exchange rate is quoted as Euros per $, then $ is the ‘base’ currency.
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