Query about ACCA (F9) Exchange rate theory

mark057

Hi everyone,

I've come across something in my F9 study and just wanted to know if I'm thinking about it correctly.

I've been calculating forward exchange rates under IRPT theory, which is simple enough.

I know the country with the higher interest rate suffers a depreciation in the value of their currency
to cancel out extra interest that can be earned by foreign investors.

What I'm not sure about is how forward exchange rates link in to the future spot rate through the
expectations theory.

I know the future spot rate can be calculated through PPPT theory and the country with the highest
inflation rates suffer a depreciation in their currency to make exports cheaper.

I also understand the Fisher formula links inflation to interest rates, with countries theoretically having
the same real rate of interest and differences in inflation rates creating the difference in interest
rates.

So is that how the forward rate and future spot rate theoretically converge? By IRPT
depreciating the forward exchange rate of a country with the highest interest rates and PPPT
depreciating the future spot rate of the country with the highest inflation?

The Kaplan book I'm using does not explain it very well.

Thanks for any suggestions.

Mark