Interest Rate Parity Redux A slightly different approach

1
Interest Rate Parity ReduxA (slightly) different
approach

• Return on domestic deposits (R) must equal return
  on foreign deposits measured in
• (1Rt) Ee x (1R) / Et
• or
• Et (1R) / (1Rt) 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