Law of One Price: P $ * S = P ¥ Purchasing Power Parity (PPP): S(¥/$) = P ¥ /P $ Real Effective Exchange Rate (REER): ¥ $ $ $ * C C E E N R = Fisher Effect: π π π π + ≅ + + = − + + = r r r r i 1 ) 1 )( 1 ( International Fisher Effect: ¥ $ 2 2 1 i i S S S − = − where S 1 and S 2 are ¥/$ Forward Rate: ⎥ ⎥ ⎥ ⎥ ⎦ ⎤ ⎢ ⎢ ⎢ ⎢ ⎣ ⎡ ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + = 360 * 1 360 * 1 * $ ¥ ¥/$ ¥/$ N i N i S F N or ⎥ ⎥ ⎥ ⎥ ⎦ ⎤ ⎢ ⎢ ⎢ ⎢ ⎣ ⎡ ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + = 360 * 1 360 * 1 * $ ¥ N i N i Spot Fwd Forward Premium/Discount: 100 * 360 * 100 * 360 * $) / ¥ ( $) / ¥ ( $) / ¥ ( ¥vs$ N Fwd Fwd Spot N F F S f N N N − = − = 100 * 360 * 100 * 360 * ) £ / ($ £) / ($ ) £ / ($ $vs£ N Spot Spot Fwd N S S F f N N − = − = Interest Rate Parity (IRP): ) ¥/$ ( ) 1 ( ) 1 ( ) ¥/$ ( $ ¥ S i i F + + = or Spot i i Fwd ) 1 ( ) 1 ( $ ¥ + + = Cross-Exchange Rate: ) £ $ ( * ) $ ¥ ( ) £ ¥ ( S S S = Forward Cross-Exchange Rate: $) / £ ( $) / ¥ ( ) ¥ / ($ ) £ / ($ ) £ / ¥ ( N N N N N F F F F F = = Futures Value of short position = - Notional Principal * (Spot – Future) Value of long position = Notional Principal * (Spot – Future) Options (S t = spot price at time of expiry; E = exercise or strike price) Calls: C aT = C eT = Max [S t – E, 0] Profit for long call: Spot – (Strike + Premium) Profit for short call: Premium – (Spot – Strike) Puts: P aT = P eT = Max [E – S t , 0] Profit for long put: Strike – (Spot + Premium) Profit for short put: Premium – (Strike – Spot) Present Value (PV)/Future Value (FV) If have PV, FV = PV * (1 + interest rate) If have FV, PV = FV / (1 + interest rate) Cost of Capital ) )( 1 ( ) ( V D t k V E k k d e WACC − + = ) _ _ ( ) ( premium risk market k k k k k rf rf m rf e β β + = − + = where m j jm j σ σ ρ β = Cost of Debt/Equities in Home Currency )] 1 )( 1 [( $ s k k foreign + + = - 1 where s = change in exchange rate International Portfolio Measures E(r p ) = w a E(r a ) + w b E(r b ) ab b a b a b b a a p w w w w ρ σ σ σ σ σ 2 2 2 2 2 + + = Sharpe Measure: i f i i R R SHP σ − = Treynor Measure: i f i i R R TRN β − =

Final Formulas

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Law of One Price: P$ * S = P Purchasing Power Parity (PPP): S(/$) = P/P$

Real Effective Exchange Rate (REER): $

$$ *CCEE NR =

Fisher Effect: +++=++= rrrri 1)1)(1( International Fisher Effect: $

2

21 iiSSS = where S1 and S2 are /$

Forward Rate:

+

+=

360*1

360*1

*$

/$/$

Ni

NiSFN or

+

+=

360*1

360*1

*$

Ni

NiSpotFwd

Forward Premium/Discount:

100*360*100*360*$)/(

$)/($)/(vs$ NFwd

FwdSpotNF

FSfN

NN

==

100*360*100*360*)/($

)/($)/($$vs NSpot

SpotFwdNS

SFf NN==

Interest Rate Parity (IRP): )/$()1()1()/$(

$

SiiF +

+= or SpotiiFwd

)1()1(

$

++=

Cross-Exchange Rate: )$(*)

$()

( SSS =

Forward Cross-Exchange Rate: $)/($)/(

)/($)/($)/(

N

N

N

NN F

FFFF ==

Futures Value of short position = - Notional Principal * (Spot Future) Value of long position = Notional Principal * (Spot Future) Options (St = spot price at time of expiry; E = exercise or strike price) Calls: CaT = CeT = Max [St E, 0] Profit for long call: Spot (Strike + Premium) Profit for short call: Premium (Spot Strike) Puts: PaT = PeT = Max [E St, 0] Profit for long put: Strike (Spot + Premium) Profit for short put: Premium (Strike Spot) Present Value (PV)/Future Value (FV) If have PV, FV = PV * (1 + interest rate) If have FV, PV = FV / (1 + interest rate) Cost of Capital

))(1()(VDtk

VEkk deWACC +=

)__()( premiumriskmarketkkkkk rfrfmrfe +=+= where m

jjmj

= Cost of Debt/Equities in Home Currency

)]1)(1[($ skk foreign ++= - 1 where s = change in exchange rate International Portfolio Measures E(rp) = waE(ra) + wbE(rb) abbababbaap wwww 22222 ++= Sharpe Measure:

i

fii

RRSHP

= Treynor Measure: i

fii

RRTRN

=

FuturesOptions (St = spot price at time of expiry; E = exercise or Profit for long put: Strike (Spot + Premium) Profit for shPresent Value (PV)/Future Value (FV)Cost of CapitalCost of Debt/Equities in Home CurrencyInternational Portfolio Measures