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Interest Rate Parity Redux A (slightly) different approach

Interest Rate Parity Redux A (slightly) different approach. Return on domestic deposits (R) must equal return on foreign deposits measured in $ (1+R t ) = E e x {(1+R € ) / E t } or E t = {(1+R € ) / (1+R t )} x E e

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Interest Rate Parity Redux A (slightly) different approach

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  1. Interest Rate Parity ReduxA (slightly) different approach • Return on domestic deposits (R) must equal return on foreign deposits measured in $ (1+Rt) = Ee x {(1+R€) / Et } or Et = {(1+R€) / (1+Rt)} x Ee Where Et = spot exchange rate ($/€) consistent with interest rate parity for given values of R€ and Ee 1 + R€ = gross return on foreign deposits 1 + Rt = gross return on domestic deposits right now Ee = exchange rate ($/€) expected in future Note the inverse relation between Et and Rt

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