Interest Rate Parity and Purchasing Power Parity

Interest Rate Parity & Purchasing power parity Presented by Danish Hasan Ramiz Junaid Zamir

Interest Rate Parity ,[object Object]

[object Object],[object Object]

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Explanation ,[object Object],[object Object],[object Object]

Mathematically Rate of return in local currency Rate of return in foreign currency =

[object Object],[object Object],[object Object]

Violation of IRP ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Implications of IRP ,[object Object],[object Object]

[object Object],[object Object],Implications of IRP

Purchasing power parity ( PPP ) ,[object Object]

Need for PPP ,[object Object]

Fluctuations ,[object Object]

Reasons for different measures ,[object Object],[object Object],[object Object],[object Object],[object Object]

Range and quality of goods ,[object Object],[object Object]

List by the International Monetary Fund (2008) 439,558 Pakistan 27 2,260,907 Russia 6 2,910,490 Germany 5 3,288,345 India 4 4,354,368 Japan 3 7,916,429 China 2 14,264,600 United States 1 GDP (PPP) $M Country Rank

Factors effecting ,[object Object]

Factors of PPP ,[object Object],[object Object],[object Object],[object Object]

Factors for IRP ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Formulas F o = forward rate S o = current spot rate i c = interest rate in country c i b = interest rate in country b S 1 = expected spot rate S o = current spot rate i c = expected inflation rate in country c i b = expected inflation rate in country b } } PPP IRP

Solution S o = 5.4670 i c = 14% or 0.14 i b = 9% or 0.09 F = 5.4670 x (1 + 0.14) (1 + 0.09) F = 5.7178

Solution S o = 8 i c = 5% or 0.05 i b = 8% or 0.08 S 1 = 8 x (1 + 0.05) (1 + 0.08) S 1 = 7.78

Interest Rate Parity and Purchasing Power Parity

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Interest Rate Parity and Purchasing Power Parity