For example the formula for Relative Purchasing Parity in Schweser looks a lot different than the one on page 529 in the CFAI Economics book.
I’m sure this all makes sense somehow, but don’t know how. Maybe someone can show me how you can derive one from the other via algebra?
bump
Can you give examples of the two? For Relative PPP, there’s an actual version and an approximate version but it’s all the same idea (the change in Spot FX rate is the difference in inflation rates)
Sure, this is what I see:
Schweser Relative Purchasing Power:
St = S0 *((1+inflationA)/(1+inflationB)^t)
CFAI pg. 529 Econ
%changeS = inflationA - inflationB
I guess thinking about it, they both show that an increase in inflation A increases the spot rate at St, like you say.
I guess Schweser presented it that way because it makes it more relateable for questions on the test, you can just plug in the spot, inflation rates, and time period and you have your future spot rate.
Yeah, the CFA one is the approximate version. Because interest rates tend to be low (1+A)/(1+B)-1 tends to be very close to A - B. I think that any question would allow you to use either.