According to the four-way equivalence model, both interest rates and inflation rates are theoretically associated with expected changes in spot rates. Your task is to review the empirical evidence relating to this statement and determine whether these theoretical relationships have any basis in reality. The “four-way equivalence model” is a relationship between interest rates and inflation rates taking into account exchange rates and also the exchange rate. expected changes in spot rates. It gives the idea of ​​how these things are interconnected and how increasing one factor would affect the other and vice versa. Machiraju (2002,75) explains the basis of this concept with these words: “In competitive markets with a large number of buyers and sellers and low-cost access to information, the correct prices for the exchange of tradable goods and assets finances must be the same throughout the world. This law of one price is enforced by international arbitrageurs who buy low and sell high and prevent any deviation from equality. Four theoretical economic relationships emerge from arbitrage economic activity.” Individual Linking Theories: There are five individual theories that directly impact this relationship mentioned and explained below:1. Theory of interest rate parity: link between interest rates, spot rates and forward exchange rates2. The Fisher effect: linking interest rates to expected inflation rates3. Expectations Theory - Forward Exchange Rates and Future Spot Exchange Rates4. The International Fisher Effect – Managing Interest Rate Differentials and the Expected Change in Spot Exchange Rates5. Purchasing Power Parity Theory - Inflation Rate Differentials Explained and... middle of paper... higher rate to depreciate relative to a country with lower interest rates. It is clearly demonstrated that the 'difference in interest rates' is equal to 'The expected difference in inflation rates' and the 'Expected change in spot rate' are equal to the 'expected difference in inflation rates' and the 'Difference in interest rates'. interest'. Therefore, it can be said with certainty that both interest rates and inflation rates are theoretically associated with expected changes in spot rates. References: Frisch, H., 1983. Cambridge Theories : Cambridge University Press.Ignatiuk, A., 2008. Principle, practice and problems of purchasing power parity theory. 1st ed. Norderstedt: BoD – Books on Demand.Machiraju, H.R., 2002. International financial markets and India. 1st ed. New Delhi: New Age International.Madura, J., 2008. International Financial Management.