What is the reasoning behind dividing the Forward rate with the current spot rate. What is the reasoning behind it mathmatically what value do we get out of it The Formula for Covered Interest Rate Parity IsF(1+ ia)* (1+ if)Swhere:iaThe interest rate in the domestic currency or the base curreis= The interest rate in the foreign currency or the quoted currS = The current spot exchange rateF = The forward foreign exchange rate

Interest Rate Parity refers to the phenomena that returns to investment become equal whether the…

The Formula for Covered Interest Rate Parity Is F (1+ ia) S * (1+ i;) where: id = The interest rate in the domestic currency or the base curre if = The interest rate in the foreign currency or the quoted curr S = The current spot exchange rate %3D F = The forward foreign exchange rate

The Formula for Covered Interest Rate Parity Is F (1+ ia) S * (1+ i;) where: id = The interest rate in the domestic currency or the base curre if = The interest rate in the foreign currency or the quoted curr S = The current spot exchange rate %3D F = The forward foreign exchange rate

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter6: Managing In The Global Economy

Section: Chapter Questions

Problem 12E

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Question

What is the reasoning behind dividing the Forward rate with the current spot rate. What is the reasoning behind it mathmatically what value do we get out of it

The Formula for Covered Interest Rate Parity Is
F
(1+ ia)
* (1+ if)
S
where:
ia
The interest rate in the domestic currency or the base curre
is
= The interest rate in the foreign currency or the quoted curr
S = The current spot exchange rate
F = The forward foreign exchange rate

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