International Fisher Relation

CFA Level II Economics
#1

I cant seem to understand how they solve this problem.

Suppose that you are given the following information about Australia, Switzerland, and the United States. The Australian Dollar is expected to depreciate relative to the USD. The nominal Interest rate in the US is greater than that in Switzerland. Can you say whether the AUD is expected to depreciate or appreciate relative to Swiss Franc?

From my understanding F/ S = 1+R$ / 1+ R AUD$

So if it was expected to depreciate I would think that F would be smaller than S therefore R$ would be smaller than R AUD $.

The book says because the AUD is expected to depreciate relative to the dollar, we know from the combination of international Fisher Relation and relative PPP that the nominal Interest rate in AUD is greater than the nominal USD rate. Can someone please explain this to me? Thank you so much!

Reading 18, Econ Question number 13

#2

“The Australian Dollar is expected to depreciate relative to the USD. The nominal Interest rate in the US is greater than that in Switzerland.” So the nomial rates are Swiss Since the australian nominal is greater than the swiss, the australian will deprecaite according to the formula F= S(domestic/foreign) * (1+r domestic)/ (1+r foreign) Domestic = AUD, Foreign = Swiss

#3

“The Australian Dollar is expected to depreciate relative to the USD. The nominal Interest rate in the US is greater than that in Switzerland.” So the nomial rates are Swiss Since the australian nominal is greater than the swiss, the australian will deprecaite according to the formula F= S(domestic/foreign) * (1+r domestic)/ (1+r foreign) Domestic = AUD, Foreign = Swiss

#4

I tackled it this way. the AUD is going to depreciate aginst the USD. so AUD must have a high nominal rate and higher inflation than the USD. Then the USD is going to depreciate aginst the SF since the USD has a higher nominal rate and thus higher inflation.

So if the USD has lower inflation than AUD but swiss inflation is even lower than US then AUD must have higher nominal (inflation) than both and therefore depreciate against SF

#5

From GMAT:

If a>b and b>c, is a>c?

#6

In a way this is uncovered interest parity.

First, according to relaive PPP, if AUD is expected to depreciate against USD, then inflation in Australia is higher than US.

Next, use this in International Fisher relation, you will see that nominal intrest rates of AUD is higher than USD. So, if r(USD) is higher than r(SF), then r(AUD) is higher than r(SF).

Applying this in uncovered interest parity, you will see that AUD is expected to depreciate against the SF.

#7

Yeah, I must have been really tired. Made a classical mistake and was using arrows for up and down to show appreciation or depreciation in my fraction. Then read a down arrow as depreciation, not a good way to look at things. I should have wrote an increase number in numerator to reflect depreciated currency. Got confused. Lesson learned. Thanks