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!
[1+ (Intfc/(360/k)] = (F/S)x[1+ (IntUSD/(360/k)]
Taking natural logs, linear approximation is:
Intfc - IntUSD = ((F-S)/S)*(360/k)
Intfc = interest rate of foreign currency
IntUSD = interest rate of US Dollar
F = Forward exchange rate
S = Spot exchange rate
K = # of days