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The Four Way Equivalence Model

The document outlines a four-way equivalence model showing the relationship between interest rates, inflation rates, forward rates, and expected changes in spot rates. Specifically, it shows that the difference in interest rates equals the expected difference in inflation rates, which equals the difference between forward and spot rates, which equals the expected change in the spot rate.

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Zoe Chim
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3K views

The Four Way Equivalence Model

The document outlines a four-way equivalence model showing the relationship between interest rates, inflation rates, forward rates, and expected changes in spot rates. Specifically, it shows that the difference in interest rates equals the expected difference in inflation rates, which equals the difference between forward and spot rates, which equals the expected change in the spot rate.

Uploaded by

Zoe Chim
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The four-way equivalence model:

Difference in interest rates (1 + ic) (1 + ib) EQUALS(2) EQUALS (1) Expected difference in inflation rates: (1 + hc ) (1 + hb).

(5) EQUALS(3)

Difference between forward and spot rates Fo So 1) 2) 3) 4) 5) Fisher Effect Interest rate parity Purchasing power parity Expectations theory International Fisher

EQUALS (4)

Expected change in spot rate: S1 S0

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