Arbitraging is a crucial technique used in the market. Currently in the United States there are five different parity conditions that are the result from arbitraging activities. They consist of: The Purchasing Power Parity, The Fisher Effect, The International Fisher Effect, the Interest Rate Parity, and the Unbiased Forward Rate. Each of these conditions differs from each other slightly but based on the same assumptions. The first parity we will look at is the Purchasing Power Parity. The Purchasing Power Parity “states that spot exchange rates between currencies will change to the differential in inflation rates between countries,” as defined by Dr. Greco. The Purchasing Power Parity also states that the country with the higher inflation rate will see their currency depreciate at a faster rate than a country with a lower inflation rate. The Fisher Effect states the real interest rate is equal to the nominal interest rate minus the inflation rate. For example, if a savings account pays a 4.0% rate and the inflation rate is 3.0%, then the real interest rate taking into account inflation is 1.0%. The 1.0% rate is the actual rate your money would be growing at. Ivestopedia.com defines the International Fisher Effect as, “An economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time.” Countries with higher inflation rates are going to expect higher rates of return. The last two methods to look at are the Interest Rate Parity and the Unbiased Forward Rate. The Interest Rate Parity as defined by Dr. Greco is, “the forward rate differs by the spot rate at equilibrium by an amount equal to the interest differential between two countries.” For example, if a country has higher interest rates, than the currency should see an increase in value. Lastly the Unbiased Forward Rate states the expected future spot rate should reflect the forward rate if it is unbiased. Source:Greco, Joseph. Chapter 4 PowerPoint – Parity Conditions in International Finance and Currency Forecasting