Talk:Interest rate parity

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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