Law of One Price:

Purchasing Power Parity (PPP):

Real Effective Exchange Rate (REER):
Fisher Effect:
International Fisher Effect:

P$ * S = P
S(/$) = P/P$
C$
E R$ = E N$ *
C
i = (1 + r )(1 + ) 1 = r + + r r +
S1 S 2
= i $ i where S1 and S2 are /$
S2

N
N
1 + i * 360
1 + i * 360

/$
/$
or Fwd = Spot *
FN = S *
Forward Rate:
N
N

1 + i $ *
1 + i $ *

360
360

Forward Premium/Discount:
S ( / $) FN ( / $) 360
Spot Fwd 360
f N vs$ =
*
* 100 =
*
* 100
FN ( / $)
N
Fwd
N
F ($ / ) S ($ / ) 360
Fwd Spot 360
f N $vs = N
*
* 100 =
*
* 100
S ($ / )
N
Spot
N
(1 + i )
(1 + i )
Interest Rate Parity (IRP):
F ( /$) =
S ( /$) or Fwd =
Spot
(1 + i$ )
(1 + i$ )

$
Cross-Exchange Rate:
S( ) = S( ) * S( )

F ($ / ) FN ( / $)
FN ( / ) = N
=
Forward Cross-Exchange Rate:
FN ($ / ) FN ( / $)
Futures
Value of short position =
- Notional Principal * (Spot Future)
Value of long position =
Notional Principal * (Spot Future)
Options (St = spot price at time of expiry; E = exercise or strike price)
Calls:
CaT = CeT = Max [St E, 0]
Profit for long call: Spot (Strike + Premium)
Profit for short call: Premium (Spot Strike)
Puts:
PaT = PeT = Max [E St, 0]
Profit for long put: Strike (Spot + Premium)

Profit for short put: Premium (Strike Spot)

Present Value (PV)/Future Value (FV)

If have PV, FV = PV * (1 + interest rate)

If have FV, PV = FV / (1 + interest rate)

Cost of Capital
E
D
kWACC = k e ( ) + k d (1 t )( )
V
V

k e = k rf + ( k m k rf ) = k rf + ( market _ risk _ premium ) where j =

jm j
m

Cost of Debt/Equities in Home Currency

k $ = [(1 + k foreign )(1 + s )] - 1 where s = change in exchange rate
International Portfolio Measures

p = wa2 a2 + wb2 b2 + 2 wa wb a b ab

E(rp) = waE(ra) + wbE(rb)

Sharpe Measure:

SHPi =

Ri R f

Treynor Measure:

TRN i =

Ri R f