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Foreign Exchange Parity Relations
Foreign Exchange Parity Relations
Foreign
Exchange
Parity
Relations
Exact relation
F/S = (1 + rFC)/(1 + rDC)
Linear approximation
ƒ = F/S -1 rFC - rDC
Relative PPP
This claims that the percentage movement of
the exchange rate should be equal to the
inflation differential between the two
economies
The PPP relation is presented as:
Exact
S1/S0 = (1 + IFC)/(1 + IDC)
Linear approximation
s = S1/S0 – 1 IFC - IDC
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Purchasing Power Parity (PPP) Relation
Customs data
Central bank stats
Bank reports of transactions
Current Account
Capital account
Financial account
Official reserve account
Exchange
Rate
Dynamics