Interest Rate Parity and Purchasing Power Parity

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

2. Interest Rate Parity (IRP)

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

12. Purchasing power parity (PPP)

21. 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

25. 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

27. 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

29. 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

31. Thank you