Imagine you are interested in estimating the exchange rate
between the Chilean Peso and the USD in say... 20 years. Using Interest RateParity, we can easily tackle this question. Imagine the current spot rate is
500CLP=1USD. Assume you are given the
following rates and yield curve.
Recall that Interest Rate Parity states that
This means that the future exchange rate is a function of
the interest rate differentials between the two countries. It is VERY important
to be aware of what is home and what is abroad…
Our spot rate is given in CLPs per USD. This implies that
home is Chile. With this in mind, we can calculate that the exchange
rate 20 years from now should be 813.29
CLPs per 1 USD.
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