Econ for Valuation - Interest Rate Parities

[gsauls4]

In the equations for interest parity (e.g. covered, uncovered, relative PPP etc.) is the rate or inflation denominated with an A always the “price currency” and conversely, B always the “base currency”?

I seem to be mixing those up, especially when the quote is given something like $1 = 0.74 Euros (which should really be flipped so 1/0.74 or $1.3381 USD/EUR).

Thanks.

[S2000magician]

In a quote A/B xxx.xx, A is the price currency and B is the base currency. There’s nothing special about it; if the quote had been written B/A yyy.yy, then B would be the price currency and A the base currency.

I’ve written some articles on exchange rates that may be of some help:

• Currency exchange rates: http://financialexamhelp123.com/currency-exchange-rates/
• Covered interest rate parity: http://financialexamhelp123.com/covered-interest-rate-parity-irp-pricing-currency-forwards/
• Triangular arbitrage: http://financialexamhelp123.com/triangular-arbitrage/
• Pricing currency forwards: http://financialexamhelp123.com/pricing-currency-forwards/
• Valuing currency forwards: http://financialexamhelp123.com/valuing-currency-forwards/

[CMLSML]

@gsauls4

I seem to be mixing those up, especially when the quote is given something like $1 = 0.74 Euros (which should really be flipped so 1/0.74 or $1.3381 USD/EUR).

Why flip? This can be simply interpreted as 0.74 EUR/$

[gsauls4]

CMLSML - thats what I was using in my original calculations. I will have to double-check tonight, but all the answers given by the Schweser notes were using $1.3381 USD/EUR.