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Technical note
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Reference no. UVA-F-1572
Published by: Darden Business Publishing
Originally published in: 2008
Version: 18 October 2019
Revision date: 28-Oct-2019

Abstract

This note reviews the four central parity conditions that underlie most theories regarding the relationship between exchange rates, inflation, and interest rates. The concepts are illustrated through a unified example exploring the relation between the US dollar and the Norwegian krone. The note presents both an intuitive understanding of the relations as well as precise mathematical formulas frequently employed in analysis.

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Abstract

This note reviews the four central parity conditions that underlie most theories regarding the relationship between exchange rates, inflation, and interest rates. The concepts are illustrated through a unified example exploring the relation between the US dollar and the Norwegian krone. The note presents both an intuitive understanding of the relations as well as precise mathematical formulas frequently employed in analysis.

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