Hello,

Can anyone explain how my finance professor arrives at the following linear approximation of the interest rate parity principle? My log skills are failing me.

Thanks for the help!

B

[1+ (Intfc/(360/k)] = (F/S)x[1+ (IntUSD/(360/k)]

Taking natural logs, linear approximation is:

Intfc - IntUSD = ((F-S)/S)*(360/k)

ps:

Intfc = interest rate of foreign currency

IntUSD = interest rate of US Dollar

F = Forward exchange rate

S = Spot exchange rate

K = # of days