Interest Rate Parity Unbiased Forward Rates And The International Fisher Effect

The next issue we need to address is the relationship between spot exchange rates, forward exchange rates, and interest rates. To get started, we need some additional notation:

Ft = Forward exchange rate for settlement at time t RUS = U.S. nominal risk-free interest rate Rfc = Foreign country nominal risk-free interest rate

As before, we will use S0 to stand for the spot exchange rate. You can take the U.S. nominal risk-free rate, RUS, to be the T-bill rate.

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