Talk:Interest rate parity/Archive 1

Archive 1

re: interpreting the equation

I found the text interpretation to be incredibly confusing

"A more approximate version is sometimes given, although it is less correct for countries with high exchange rates:

The chief implication of the interest parity condition is that if a country's(domestic) interest rates are relatively low compared to other countries, then that country's currency will tend to depreciate(an increase in the exchange rate). Conversely, if the country's interest rates are relatively high, then the country's currency will tend to apppreciate."

The variables (domestic, etc) are defined above. The idea of appreciate or depreciate is actually something the editor is adding on his own - probably assuming that the forward price equals expected spot. I won't argue the point, but it is not in THIS equation.

Finally talking about appreciation/depreciation can confuse two differnt things, expected appreciation (as the equation would show IF F = E(S)), and unexpected appreciation, as when the domestic interest rate unexpectedly increases - usually you'd think that the SPOT foreign currency would unexpectedly decrease, but the difference in the forward and the spot would increase. So it's not clear here which you are talking about.

Interest rate parity is a currency topic, while forward/futures pricing, though related, is a commodities topic. The two should have separate, but cross-referenced, entries. Georgez 02:37, 15 December 2006 (UTC)georgez

While both these topics deal with arbitrage and parity conditions, interest rate parity and spot-futures deal with different markets. Just as similarly, we would not want to start combining asset pricing models for options that arbitrage theory with this topic as well. Moreover, the idea may be similar, but the implications are vastly different. What is neglected in this article are some of the failings of uncovered interest parity, namely the forward premium puzzle. As far as the presentation, the scant treatment of uncovered interest rate parity and the lack of explicit formulation is annoying to say the least. A cross-reference with arbitrage theory and exchange rate determination would be useful, as well as a better treatment of model.

interest r

Surely: (1 + i_\$) = (F/S) (1 + i_c)\;

should be: (1 + i_\$) = (S/F) (1 + i_c)\; —Preceding unsigned comment added by Rmconrad (talk • contribs) 14:49, 6 September 2007 (UTC)

(This is the same as my previous comment, but formatted more legibly.)

Surely: $(1+i_{\$})=(F/S)(1+i_{c})\;$

should be: $(1+i_{\$})=(S/F)(1+i_{c})\;$

--Rmconrad 15:18, 6 September 2007 (UTC)

I would be able to pass an expert comment, IF I KNEW WHAT S AND F MEANT IN THE FIRST PLACE! Assuming it's Forward and Spot rate, it should be S/F, and I'm quoting Blanchard's Macroeconomics - ISBN 013207963-1, page 412. Ratibgreat (talk) 03:49, 11 April 2011 (UTC)

Changed it. Ratibgreat (talk) 04:35, 11 April 2011 (UTC)

This would be incorrect, although I see the article has been corrected to use ${\frac {F}{S}}$. Blanchard's Macroeconomics is either being misinterpreted or contains an error. I have numerous textbooks and journal articles verifying that the forward exchange rate F should be divided by the spot exchange rate S. John Shandy` • talk 03:36, 26 June 2011 (UTC)

Error in the article.

I agree and can verify the above commentator's suggestion regarding the IRP idendity. The F and the S are the wrong way round in the article. —Preceding unsigned comment added by 143.117.143.33 (talk) 19:15, 20 February 2008 (UTC)

Not well written

I found this article not well written. For example, while telling us about the covered interest rate parity theorem, the article should start by stating why is it called the covered interest rate parity theorem (I think because you cover your position by buying a currency future). It should not directly start with the equation.

Also, the notations in the equations should be made more explicit. Exchange rates can be confusiing so, when one says F is the future exhange rate, one should specify between what currency to what other currency. The article should be written such that a person hearing about this the first time understands the concepts. Right now it seems to be written more like a revision note for someone who already knows what Interest rate parity means. —Preceding unsigned comment added by Cosco17 (talk • contribs) 08:18, 25 December 2009 (UTC)

Comment moved from the article

Who can explain the simbols in the function? —Preceding unsigned comment added by 129.173.208.145 (talk • contribs)

Introducing a formula or equation without defining the variables is really not very helpful for a general audience. What are F, S etc? Something like

$(1+i_{\$})=(F/S)(1+i_{c})\;$, where $i_{\$}$ is the dollar-foo constant, $F$ is the bar value, $S$ is the baz number and $i_{c}$ is the qux number in currency c

might be good, but I have no idea what the symbols mean. —Preceding unsigned comment added by 220.253.80.174 (talk) 14:53, 3 March 2011 (UTC)

interest rate parity theory

IRP theory explains how the exchange rate in the forward market is determined. the difference between the forward rate and spot rate is known as forward rate differential. this theory postulate that the interest rate differential between two countries will affect the forward exchange rate. according to this theory the forward rate differential in the exchange of two countries will be equal to the interest rate differential between two countries.

where as forward exchange rate = spot rate ( 1+NH/1+NF )

 NH= nominal interest rate of home currency
 NF= nominal interest rate of foreign currency
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                                                                         Thoufeek. A
                                                                         IMK
                                                                         tt87@in.com,  thoufeek@in.com  —Preceding unsigned comment added by 117.206.38.254 (talk) 07:13, 14 June 2010 (UTC)