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Hello
I did not understand the concept of purchasing parity and interest parity ..for what purpose we use it and is it asked directly in the as or we need to assume things …in exam upto what maximum marks this topic could come up …I want to leave it ..although I watched a lecture in f9 section ..but still I m not confident
Purchasing power parity is used to forecast future spot rates. In exam questions it is very unlikely to be asked on its own, but is very commonly asked as part of NPV questions where the investment is in a foreign country and the remittances each year need converting to the home countries currency. You need a forecast of what the spot rate will be each year and we use PPP to calculate them.
Interest rate parity is how forward rates are calculated. This is not a forecast – forward rates are always calculated based on the relative interest rates. However, it is unlikely that interest rate parity will be examined in calculations, but you could just be asked to explain the relevance of it.
I have no idea on maximum marks – not many, but it is still vital because of my first paragraph.
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