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Using the Exact International Fisher Effect From our discussion of the Fisher effect in Chapter 5 , we know that the actual relationship between a nominal rate, R , a real rate, r , and an inflation rate, h , can be written as:

This is the domestic Fisher effect.

a. What is the non-approximate form of the international Fisher effect?

b. Based on your answer in (a), what is the exact form for UIP? (Hint: Recall the exact form of IRP and use UFR.)

c. What is the exact form for relative PPP? (Hint: Combine your previous two answers.)

d. Recalculate the NPV for the Kihlstrom drill bit project (discussed in Section 20.5 ) using the exact forms for the UIP and the international Fisher effect. Verify that you get precisely the same answer either way.

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Basic Finance, Finance

Category:- Basic Finance
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