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



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.

[edit] 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)

[edit] 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)