Foreign exchange formulas Flashcards
1
Q
What is PPP?
A
S1 = So * (1+hc)/(1+bc)
The law of one price
Same product, different currencies, same price
Supply and demand will keep it the same
2
Q
What is IRP?
A
Exchange rates move with interest rates
Used to calculate forward rates
3
Q
What is FRA?
A
Forward Rate Agreement
Loan * Interest rate * months = X
Loan * FRA rate * months = (X)
Payment or compensation X
4
Q
FRA facts
A
3 v 9 = starts in year 3, lasts 6 years
Buy - Interest
3.1% - 3.0%
5
Q
Hedging - money markets - receiving currency
A
Receiving
Borrow (/borrow rate)
Sell (/spot rate)
Invest (*deposit rate)
6
Q
Hedging - money markets - paying currency
A
Paying
Invest
Buy @spot
Borrow
