Parity Conditions in International Finance and Currency Forecasting. Chapter 4
|
|
- Holly Stephens
- 6 years ago
- Views:
Transcription
1 Parity Conditions in International Finance and Currency Forecasting Chapter 4 ١
2 ARBITRAGE AND THE LAW OF ONE PRICE Five Parity Conditions Result From Arbitrage Activities 1. Purchasing Power Parity (PPP) 2. The Fisher Effect (FE) 3. The International Fisher Effect (IFE) 4. Interest Rate Parity (IRP) 5. Unbiased Forward Rate (UFR) ٢
3 PART I. ARBITRAGE AND THE LAW OF ONE PRICE I. THE LAW OF ONE PRICE A. Law states: Identical goods sell for the same price worldwide. B. Theoretical basis: If the price after exchange-rate adjustment were not equal, arbitrage in the goods worldwide ensures eventually it will. ٣
4 ARBITRAGE AND THE LAW OF ONE PRICE C. Five Parity Conditions Linked by The adjustment of rates and prices to inflation ٤
5 ARBITRAGE AND THE LAW OF ONE PRICE D. Inflation and home currency depreciation are: 1. Jointly determined by the growth of domestic money supply (M s ) and 2. Relative to the growth of domestic money demand. ٥
6 PART II. PURCHASING POWER PARITY I. THE THEORY OF PURCHASING POWER PARITY states that spot exchange rates between currencies will change to the differential in inflation rates between countries. ٦
7 PURCHASING POWER PARITY II.RELATIVE PURCHASING POWER PARITY A. states that the exchange rate of one currency against another will adjust to reflect changes in the price levels of the two countries. ٧
8 PURCHASING POWER PARITY 1. In mathematical terms: e t e 0 where e t e 0 i h i f t = (1 + i h ) t (1 + i f ) t = future spot rate = spot rate = home inflation = foreign inflation = time period ٨
9 PURCHASING POWER PARITY 2. If purchasing power parity is expected to hold, then the best prediction for the one-period spot rate should be e t = e 0 (1 + i h ) t (1 + i f ) t ٩
10 PURCHASING POWER PARITY 3. A more simplified but less precise relationship is e t - e 0 = i h - i f e 0 that is, the percentage change should be approximately equal to the inflation rate differential. ١٠
11 PURCHASING POWER PARITY 4. PPP says the currency with the higher inflation rate is expected to depreciate relative to the currency with the lower rate of inflation. ١١
12 Sample Problem Projected inflation rates for the U.S. and Germany for the next twelve months are 10% and 4%, respectively. If the current exchange rate is $.50/dm, what should the future spot rate be at the end of next twelve months? e = e t e = ( 1 + i ) h ( 1 + i ) ( ) ( ) 1 1 f t 1 t e =.50(1.0577) 1 e = $ ١٢
13 PART III. THE FISHER EFFECT I. THE FISHER EFFECT states that nominal interest rates (r) are a function of the real interest rate (a) and a premium (i) for inflation expectations. R = a + i ١٣
14 PART IV. THE INTERNATIONAL FISHER EFFECT A. Real Rates of Interest 1. Should tend toward equality everywhere through arbitrage. 2. With no government interference nominal rates vary by inflation differential or r h - r f = i h - i f ١٤
15 THE INTERNATIONAL FISHER EFFECT B. According to the IFE, countries with higher inflation rates have higher interest rates. C. Due to capital market integration globally, interest rate differentials are eroding. ١٥
16 THE INTERNATIONAL FISHER I. IFE STATES: EFFECT A. the spot rate adjusts to the interest rate differential between two countries. B. IFE = PPP + FE e t e 0 = (1 + r h ) t (1 + r f ) t ١٦
17 THE INTERNATIONAL FISHER EFFECT B. Fisher postulated: 1. The nominal interest rate differential should reflect the inflation rate differential. 2. Expected rates of return are equal in the absence of government intervention. ١٧
18 THE INTERNATIONAL FISHER EFFECT C. Simplified IFE equation: r h - r f = e t - e 0 e 0 ١٨
19 THE INTERNATIONAL FISHER EFFECT D. Implications if IFE 1. Currency with the lower interest rate expected to appreciate relative to one with a higher rate. 2. Financial market arbitrage: insures interest rate differential is an unbiased predictor of change in future spot rate. ١٩
20 The International Fisher Effect If the /$ spot rate is 108/$ and the interest rates in Tokyo and New York are 6% and 12%, respectively, what is the future spot rate two years from now? e = e t r ( ) h ( 1+ r ) f t t ( ) e 2 = ( ) 1.06 e = ( ) 2 2 ( ) 2 e = / $ 2 ٢٠
21 PART V. INTEREST RATE PARITY THEORY I. INTRODUCTION A. The Theory states: the forward rate (F) differs from the spot rate (S) at equilibrium by an amount equal to the interest differential (r h - r f ) between two countries. ٢١
22 INTEREST RATE PARITY THEORY 2. The forward premium or discount equals the interest rate differential. F - S/S = (r h - r f ) where r h = the home rate r f = the foreign rate ٢٢
23 INTEREST RATE PARITY THEORY 3. In equilibrium, returns on currencies will be the same i. e. No profit will be realized and interest parity exists which can be written (1 + r h ) = F (1 + r f ) S ٢٣
24 INTEREST RATE PARITY THEORY B. Covered Interest Arbitrage 1. Conditions required: interest rate differential does not equal the forward premium or discount. 2. Funds will move to a country with a more attractive rate. ٢٤
25 INTEREST RATE PARITY THEORY 3. Market pressures develop: a. As one currency is more demanded spot and sold forward. b. Inflow of funds depresses interest rates. c. Parity is eventually reached. ٢٥
26 INTEREST RATE PARITY If the Swiss franc is $.68/SF on the spot market and the annualized interest rates in the U.S. and Switzerland, respectively, are 7.94% and 2%, what is the 180 day forward rate under parity conditions? ( 1 + rh ) f t = e 0 ( 1 + r ) f f = f180 = $.70/ SF ٢٦
27 INTEREST RATE PARITY C. Summary: THEORY Interest Rate Parity states: 1. Higher interest rates on a currency offset by forward discounts. 2. Lower interest rates are offset by forward premiums. ٢٧
28 PART VI. THE RELATIONSHIP BETWEEN THE FORWARD AND THE FUTURE SPOT RATE I. THE UNBIASED FORWARD RATE A. States that if the forward rate is unbiased, then it should reflect the expected future spot rate. B. Stated as f t = e t ٢٨
International Parity Conditions. 1. The Law of One Price. 2. Absolute Purchasing Power Parity
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More information05/07/55. International Parity Conditions. 1. The Law of One Price
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More informationInternational Parity Conditions
International Parity Conditions Some fundamental questions of international financial managers are: - What are the determinants of exchange rates? - Are changes in exchange rates predictable? The economic
More informationInternational Parity Conditions
International Parity Conditions Eiteman et al., Chapter 6 Winter 2004 Outline of the Chapter How are exchange rates determined? Can we predict them? Prices and Exchange Rates Prices Indices Inflation Rates
More informationRelationships among Exchange Rates, Inflation, and Interest Rates
Relationships among Exchange Rates, Inflation, and Interest Rates Chapter Objectives To explain the purchasing power parity (PPP) and international Fisher effect (IFE) theories, and their implications
More informationMadura: International Financial Management Chapter 8
Madura: International Financial Management Chapter Chapter Relationships Between Inflation, Interest Rates, and Exchange Rates Chapter Objectives To explain the theories of purchasing power parity (PPP)
More informationIn frictionless markets, freely tradable goods should have the same price anywhere: S = P P $
Prices and Exchange Rates In frictionless markets, freely tradable goods should have the same price anywhere: P $ S = P P $ price in US$ S Exchange rate in yen per dollar P Price in Japanese yen Purchasing
More informationWeek-7. Dr. Ahmed. Domestic Firms International Firms Multinational Firms Global Firms
FINC 5880 Dr. Ahmed Week-7 Name Domestic Firms International Firms Multinational Firms Global Firms Factors that make multinational financial management different Exchange rates and trading International
More informationChapter 6. International Parity Conditions. International Parity Conditions: Learning Objectives. Prices and Exchange Rates
Chapter 6 International arity Conditions International arity Conditions: Learning Objectives Examine how price levels and price level changes (inflation) in countries determine the exchange rate at which
More informationMCQ on International Finance
MCQ on International Finance 1. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with a) international monetary credits. b) dollars. c) yuan,
More informationECO 328 SUMMER Sample Questions Topics I.1-3. I.1 National Income Accounting and the Balance of Payments
ECO 328 SUMMER 2004--Sample Questions Topics I.1-3 I.1 National Income Accounting and the Balance of Payments 1. National income equals GNP A. less depreciation, less net unilateral transfers, less indirect
More informationINTERNATIONAL FINANCE
INTERNATIONAL FINANCE Ing. Zuzana STRÁPEKOVÁ, PhD. 1 10. 2017/2018 SUA-FEM Nitra The FOREX market is a two-tiered market: Interbank Market (Wholesale) FUNCTION AND STRUCTURE OF THE FOREX MARKET - about
More informationChapter 19: What Determines Exchange Rates?
Chapter 19: What Determines Exchange Rates? Introduction Exchange rates over time Long-term trends Medium-term trends Short-term variability Frameworks Asset market approach Purchasing power parity (PPP)
More informationGlobal Finance : PPP, IFE, IRP Project
Global Finance : PPP, IFE, IRP Project JRL 咨询公司 (JRL Consulting) 科技管理职场发展咨询电邮 : tech@jrleeconsulting.com 网站 : www.jrleeconsulting.com Two countries (Canada and Japan) were selected for this exercise to
More informationAgenda. Learning Objectives. Chapter 19. International Business Finance. Learning Objectives Principles Used in This Chapter
Chapter 19 International Business Finance Agenda Learning Objectives Principles Used in This Chapter 1. Foreign Exchange Markets and Currency Exchange Rates 2. Interest Rate and Purchasing-Power Parity
More information2. Discuss the implications of the interest rate parity for the exchange rate determination.
CHAPTER 5 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RELATIONSHIPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition
More informationChapter 10. The Foreign Exchange Market
Chapter 10 The Foreign Exchange Market Why Is The Foreign Exchange Market Important? The foreign exchange market 1. is used to convert the currency of one country into the currency of another 2. provides
More informationCHAPTER 31 INTERNATIONAL CORPORATE FINANCE
Corporate Finance 11 th edition Solutions Manual Ross, Westerfield, Jaffe, and Jordan Completed download Solutions Manual, Answers, Instructors Resource Manual, Case Solutions, Excel Solutions are included:
More informationBBK3273 International Finance
BBK3273 International Finance Prepared by Dr Khairul Anuar L5: International Parity Conditions www.lecturenotes638.wordpress.com Contents 1. International Arbitrage 2. Locational Arbitrage 3. Triangular
More informationCLASS MATERIALS INTERNATIONAL PARITY CONDITIONS
CLASS MATERIALS INTERNATIONAL PARITY CONDITIONS ---------------------------------------------------- 1. Key Interest Rate-Exchange Rate Linkages: The Parity Framework Parity conditions are useful when
More informationThe Interest Parity Theory
Kapitel 13 The Interest Parity Theory Proposition: Two Assets with the same risk should have the same rate of return 13.1 The Covered Interest Parity (CIP) German: Gedeckte Zinsparität Mechanism: Interest
More informationLess Reliable International Parity Conditions
The International Parity Conditions The Law of One Price Interest Rate Parity Less Reliable International Parity Conditions The Real Exchange Rate 1 The International Parity Conditions Though this be madness,
More informationPractice questions: Set #5
International Financial Management Professor Michel A. Robe What should you do with this set? Practice questions: Set #5 To help students prepare for the exam and the case, seven problem sets with solutions
More informationForeign Exchange Markets: Key Institutional Features (cont)
Foreign Exchange Markets FOREIGN EXCHANGE MARKETS Professor Anant Sundaram AGENDA Basic characteristics of FX markets: Institutional features Spot markets Forward markets Appreciation, depreciation, premium,
More informationNIRAJ THAPA FOREX. Foreign exchange constitutes the largest financial market in the world.
NIRAJ THAPA ON FOREX niraj_thapa@hotmail.com Foreign exchange constitutes the largest financial market in the world. TIM Weithers : Foreign Exchange:-It s not difficult; It s just confusing Contents Topic
More informationAn Empirical Investigation of the International Fisher Effect
2002:042 SHU BACHELOR S THESIS An Empirical Investigation of the International Fisher Effect EMIL SUNDQIST Social Science and Business Administration Programmes ECONOMICS PROGRAMME Department of Business
More informationInternational Finance
International Finance Agenda Balance of payment Parity conditions in International Finance The foreign exchange market Futures and option markets Swaps and interest derivatives Measuring and managing translation
More informationArabian Group of Journals (AGJ) Accounting Research. International Journal of Accounting Research (IJAR) Webpage:
Arabian Group of Journals (AGJ) Accounting Research International Journal of Accounting Research (IJAR) Webpage: www.arabianjbmr.com/ijar_index.php ISSN: 2311-326X EXCHANGE RATE FLUCTUATIONS MAJOR FACTOR
More informationINTERNATIONAL FINANCE & FINANCIAL MARKETS MAF306 EXAM SUMMARY NOTES
INTERNATIONAL FINANCE & FINANCIAL MARKETS MAF306 EXAM SUMMARY NOTES TOPIC 1 - INTRODUCTION 4 GLOBAL OPERATION 4 TYPES OF MULTI-NATIONAL CORPORATIONS (MNC) 4 WHY FOREIGN DIRECT INVESTMENT (FDI) 4 GLOBALIZATION
More informationReplies to one minute memos, 9/21/03
Replies to one minute memos, 9/21/03 Dear Students, Thank you for asking these great questions. The answer to my question (what is the difference b/n the covered & uncovered interest rate arbitrage? If
More informationGovernments and Exchange Rates
Governments and Exchange Rates Exchange Rate Behavior Existing spot exchange rate covered interest arbitrage locational arbitrage triangular arbitrage Existing spot exchange rates at other locations Existing
More informationControllers Guide to Multinational Financial Management Chapter 1:
Controllers Guide to Multinational Financial Management Chapter 1: The What and Why of Multinational Finance 1. Recognize some special features of a multinational corporation (MNC). 2. Distinguish the
More informationLower prices. Lower costs, esp. wages. Higher productivity. Higher quality/more desirable exports. Greater natural resources. Higher interest rates
1 Goods market Reason to Hold Currency To acquire goods and services from that country Important in... Long run (years to decades) Currency Will Appreciate If... Lower prices Lower costs, esp. wages Higher
More informationCHAPTER 2. EXCHANGE RATE DETERMINATION: Exchange Rate Quotations, Balance of Payments, Prices, Parities and Interest Rates
CHAPTER 2. EXCHANGE RATE DETERMINATION: Exchange Rate Quotations, Balance of Payments, Prices, Parities and Interest Rates 1. Foreign Exchange Rates and Quotations A foreign exchange rate is the price
More informationPrepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld
Price Levels and the Exchange Rate in the Long Run Chapter 15 Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld
More information(LOS) CISA! 2 #$ %& ' ( 2 )(* $)* +)(* % ' - 2 -
ก (LOS) ก CISA 2 ก (LOS) ก CISA 2 ก 2 ก ก - 2 - ก : ก (Economics for Valuation) 1 : ก ก กก 1. ก กก ก 2. ก ก Solow Growth Model Endogenous Growth Theory ก ก 3. ก ก ก ก ก ก ก 1.1 ก ก 1.1.1 ก ก ก 1.1.2 ก
More informationCh. 7 International Arbitrage and IRP. International Arbitrage. International Arbitrage
Ch. 7 and IRP Topics Locational Arbitrage Triangular Arbitrage Covered Interest Arbitrage Impact of Arbitrage on an MNC s Value Arbitrage: The simultaneous purchase and sale of securities or foreign exchange
More informationExchange rate: the price of one currency in terms of another. We will be using the notation E t = euro
Econ 330: Money and Banking Fall 2014, Handout 8 Chapter 17 : Foreign Exchange Market 1. Foreign Exchange Market Exchange rate: the price of one currency in terms of another. We will be using the notation
More informationHomework Assignment #3: Answer Key
Econ 434 Professor Ickes Fall 2006 Homework Assignment #3: Answer Key 1. Productivity growth has increased in Central and Eastern European countries relative to Western European countries. This has implications
More informationMoney, interest rates and nominal exchange rates
International Finance Master in International Economic Policy Money, interest rates and nominal exchange rates Lectures 3-4 Nicolas Coeurdacier nicolas.coeurdacier@sciencespo.fr Lectures 3 and 4 Money,
More informationInternational Trade. International Trade, Exchange Rates, and Macroeconomic Policy. International Trade. International Trade. International Trade
, Exchange Rates, and 1 Introduction Open economy macroeconomics International trade in goods and services International capital flows Purchases & sales of foreign assets by domestic residents Purchases
More informationCHAPTER 7 FOREIGN EXCHANGE MARKET EFFICIENCY
CHAPTER 7 FOREIGN EXCHANGE MARKET EFFICIENCY Chapter Overview This chapter has two major parts: the introduction to the principles of market efficiency and a review of the empirical evidence on efficiency
More informationChapter 11. Managing Transaction Exposure. Lecture Outline. Hedging Payables. Hedging Receivables
Chapter 11 Managing Transaction Exposure Lecture Outline Policies for Hedging Transaction Exposure Hedging Most of the Exposure Selective Hedging Hedging Payables Forward or Futures Hedge Money Market
More informationLecture 26: Exchange Risk & Portfolio Diversification
Lecture 26: Exchange Risk & Portfolio Diversification Bias in the forward exchange market as a predictor of the future spot exchange rate What makes an asset risky? The gains from international diversification
More informationChapter Organization. Chapter Organization
Price Levels and the Exchange Rate in the Long Run Chapter 15 Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld
More informationA number of issues and problems in the course will require the basic knowledge of financial management that is covered in FRL 301.
FRL 353 Section 1 Multinational Financial Market CRN # 72109 Tuesday & Thursday: 10:00-11:50 a.m. Fall Quarter 2004 Building 6 Room 107 P. Sarmas www.csupomona.edu/~psarmas Catalog Description: Institutional
More informationin equilibrium, are supposed to hold across international markets. Covered Interest Rate Parity Purchasing Power Parity y( (also called the Law of
Week 4 The Parities The Parities There are three fundamental parity conditions that, in equilibrium, are supposed to hold across international markets. Covered Interest Rate Parity Purchasing Power Parity
More information8: Relationships among Inflation, Interest Rates, and Exchange Rates
8: Relationships among Inflation, Interest Rates, and Exchange Rates Infl ation rates and interest rates can have a significant impact on exchange rates (as explained in Chapter 4) and therefore can infl
More informationLectures 24 & 25: Risk
Lectures 24 & 25: Risk Lecture 24: Risk Premium & Portfolio Diversification Bias in the forward exchange market as a predictor of the future spot exchange rate What makes an asset risky? The gains from
More informationChapter 4 Research Methodology
Chapter 4 Research Methodology 4.1 Introduction An exchange rate (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two currencies is the rate at which one currency will be exchanged
More informationLessons V and VI: FX Parity Conditions
Lessons V and VI: FX March 27, 2017 Table of Contents Does the PPP Hold Parity s should be thought of as break-even values, where the decision-maker is indifferent between two available strategies. Parity
More informationNotes on the Monetary Model of Exchange Rates
Notes on the Monetary Model of Exchange Rates 1. The Flexible-Price Monetary Approach (FPMA) 2. Rational Expectations/Present Value Formulation to the FPMA 3. The Sticky-Price Monetary Approach 1. The
More informationFinancial markets in the open economy - the interest rate parity. Exchange rates in the short run.
Financial markets in the open economy - the interest rate parity. Exchange rates in the short run. Dr hab. Joanna Siwińska-Gorzelak Foreign Exchange Markets The set of markets where foreign currencies
More informationDeterminants of Exchange Rates
Determinants of Exchange Rates Why Study Exchange Rates? To understand the economic environment Forecasting for planning purposes To understand exposure to currency risk Financial impact of exchange rate
More informationChapter 3 Foreign Exchange Determination and Forecasting
Chapter 3 Foreign Exchange Determination and Forecasting Note: In the sixth edition of Global Investments, the exchange rate quotation symbols differ from previous editions. We adopted the convention that
More informationTTh 3:15-4:30 Gates B01. Handout #7 International Parity Conditions Interest Rate Parity and the Fisher Parities
TTh 3:15-4:30 Gates B01 Handout #7 International Parity Conditions Interest Rate Parity and the Fisher Parities Yee-Tien Ted Fu Course web page: http://stanford2009.pageout.net Additional Reading Assignments
More information1 trillion units * ($1 per unit) = $500 billion * 2
Under the strict monetarist view, real interest rates and money supply are assumed to be independent. Under this assumption, inflation does not affect real rates. Nevertheless, nominal rates, R, are obviously
More informationCHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. How would you define transaction exposure? How is it different from economic exposure?
More information20: Short-Term Financing
0: Short-Term Financing All firms make short-term financing decisions periodically. Beyond the trade financing discussed in the previous chapter, MCs obtain short-term financing to support other operations
More informationPrepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld
Chapter 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice
More informationIntroduction to Macroeconomics M Problem set 4
T1 T2 Introduction to Macroeconomics M5 2015-16 Problem set 4 dollar appreciate from T1 to T2? 1. Nominal rate. Consider tables T1 and T2, taken from http://www.x-rates.com/. In T1, for instance, 1 can
More information(welly, 2018)
a) Use the hypothetical information provided below to record the South African balance of payments transactions, using the double entry bookkeeping procedure. [12] Background information provided in the
More informationCapital & Money Markets
Πανεπιστήμιο Πειραιώς, Τμήμα Τραπεζικής και Χρηματοοικονομικής Διοικητικής Μεταπτυχιακό Πρόγραμμα «Χρηματοοικονομική και Τραπεζική Διοικητική» Capital & Money Markets Section 1 Foreign Exchange Markets
More informationStudy Questions (with Answers) Lecture 13. Exchange Rates
Study Questions (with Answers) Page 1 of 5 Part 1: Multiple Choice Select the best answer of those given. Study Questions (with Answers) Lecture 13 1. The statement the yen rose today from 121 to 117 makes
More informationTopic7 Management of Transaction Exposure (1)
Topic7 Management of Transaction Exposure (1) - Forward Market Hedge - Money Market Hedge Opponents of hedging (1) Stockholders are much more capable of diversifying currency risk than management of the
More informationPart I: Multiple Choice (36%) circle the correct answer
Econ 434 Professor Ickes Fall 2009 Midterm Exam II: Answer Sheet Instructions: Read the entire exam over carefully before beginning. The value of each question is given. Allocate your time efficiently
More informationMidterm - Economics 160B, Spring 2012 Version A
Name Student ID Section (or TA) Midterm - Economics 160B, Spring 2012 Version A You will have 75 minutes to complete this exam. There are 6 pages and 111 points total. Good luck. Multiple choice: Mark
More informationThe Economics of International Financial Crises 4. Foreign Exchange Markets, Interest Rates and Exchange Rate Determination
Fletcher School of Law and Diplomacy, Tufts University The Economics of International Financial Crises 4. Foreign Exchange Markets, Interest Rates and Exchange Rate Determination Prof. George Alogoskoufis
More informationForward Foreign Exchange
Forward Foreign Exchange Concept of exchange rate risk or exposure» Hedging: Reducing exposure to exchange rate risk» Speculation: Increasing exposure to exchange rate risk Using the forward market to
More informationLessons V and VI: Overview
Lessons V and VI: Overview 1. FX parity conditions 2. Do the PPP and the IRPs (CIRP and UIRP) hold in practice? 1 FX parity conditions 2 FX parity conditions 1. The Law of One Price and the Purchasing
More information1. The Flexible-Price Monetary Approach Assume uncovered interest rate parity (UIP), which is implied by perfect capital substitutability 1.
Lecture 2 1. The Flexible-Price Monetary Approach (FPMA) 2. Rational Expectations/Present Value Formulation to the FPMA 3. The Sticky-Price Monetary Approach 4. The Dornbusch Model 1. The Flexible-Price
More informationChapter Ten. The Foreign Exchange Market
Chapter Ten The Foreign Exchange Market Volkswagen s Hedging Strategy 10-3 Volkswagen, Europe s largest carmaker, reported a 95% drop in 2003 fourth-quarter profits The cause for the slump had many reasons
More informationChapter 18 Exchange Rate Theories (modified version)
Chapter 18 Exchange Rate Theories (modified version) Topics to be covered Exchange Rate Determination 1. The Elasticities Approach 2. The Asset Approach 2a. The Monetary Approach to the Exchange Rate 2b.
More informationMaster thesis in finance
THE NORWEGIAN SCHOOL OF ECONOMICS AND BUSINESS ADMINISTRATION Is the Chinese currency, the Renminbi, correctly valued? Master thesis in finance Author: Shi Wei Wang Thesis supervisor: Stig Tenold Bergen,
More informationTo Fix or Not to Fix?
To Fix or Not to Fix? Linda Tesar, Department of Economics Notes at: http://www.econ.lsa.umich.edu/~ltesar April 5, 2000 Fixed vs. Flexible Exchange rates The Theory: Money demand: M/P = L(Y,I) Interest
More informationBond and Common Share Valuation
Bond and Common Share Valuation Lakehead University Fall 2004 Outline of the Lecture Bonds and Bond Valuation The Determinants of Interest Rates Common Share Valuation 2 Bonds and Bond Valuation A corporation
More informationChapter 16. Price Levels and the Exchange Rate in the Long Run
Chapter 16 Price Levels and the Exchange Rate in the Long Run Preview Law of one price Purchasing power parity Long-run model of exchange rates: monetary approach (based on absolute version of PPP) Relationship
More informationgement JEFF MADURA "Fldfida'J&lantic University .,. ;. O r> Ll.l K 1 i UNIVERSnAT LIECHTENSTEIN Blbllothett SOUTH-WESTERN CENGAGE Learning- " ^ si-
f f >' ' '^11 ABRIDGED 10TH EDITION gement JEFF MADURA "Fldfida'J&lantic University Ll.l K 1 i.,. ;. O r> UNIVERSnAT LIECHTENSTEIN Blbllothett /, " ^ si- -A- SOUTH-WESTERN CENGAGE Learning- Australia Brazil
More informationInternational Economics II Lecture Notes 2
International Economics II Lecture Notes 2 Alper Duman February 23, 2012 Turkish citizens paid 65 billion TL as ÖTV (luxury tax) on items such as tobacco, alcohol, gasoline and telecommunications. Does
More informationSELECTED INTEREST & EXCHANGE RATES FOR MAJOR COUNTRIES & THE US.
December 16, 1970 No. 484 H-13 Division of International Finance Europe and British Commonwealth Section zy Q0tU rwotj SELECTED INTEREST & EXCHANGE RATES FOR MAJOR COUNTRIES & THE US. WEEKLY SERIES OF
More informationExchange Rates in the Long Run
Exchange Rates in the Long Run What determines exchange rates? Supply + Demand!» Flow models: Demand & supply of FX to purchase goods and services» Stock models, or asset models Demand & supply of available
More informationInternational Financial Management FINA 4836 Rauli Susmel Spring 1997 Second Midterm Exam
International Financial Management FINA 4836 Rauli Susmel Spring 1997 Second Midterm Exam No points will be given by simply writing down formulas, and writing down definitions or irrelevant statements
More informationSelected Interest & Exchange Rates
(516/517) Selected Interest & Exchange Rates W eekly Series o f Charts June 29, 1998 DIVISION OF INTERNATIONAL FINANCE Prepared by the FINANCIAL MARKETS SECTION BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM
More informationAssignment 4 Economics 222, Fall 2006 Due: Drop Box 2 nd floor Dunning Hall by noon Nov. 24th, 2006 Maximum Group Size: 4 people
Assignment 4 Economics 222, Fall 2006 Due: Drop Box 2 nd floor Dunning Hall by noon Nov. 24th, 2006 Maximum Group Size: 4 people A Long and Involved IS-LM-FE Numerical Example Our first task is to solve
More informationName Student ID Summer Session II Midterm ECON160B There are 7 pages and 100 points. You have 100 minutes to complete the exam.
Name Student ID Summer Session II 2013 Midterm ECON160B There are 7 pages and 100 points. You have 100 minutes to complete the exam. Multiple Choice Choose the best answer. (2.5 points each, 30 points
More informationEmpirical Evidence of International Fisher Effect in Bangladesh with India and China
Empirical Evidence of International Fisher Effect in Bangladesh with India and China Md. Mahmudul Alam* PhD Research Fellow Institute for Environment and Development (LESTARI) National University of Malaysia,
More informationChapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy
Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy 1 Goals of Chapter 13 Two primary aspects of interdependence between economies of different nations International
More informationMidterm - Economics 160B, Fall 2011 Version A
Name Student ID Section (or TA) Midterm - Economics 160B, Fall 2011 Version A You will have 75 minutes to complete this exam. There are 5 pages and 108 points total. Good luck. Multiple choice: Mark best
More informationInterest rates and exchange rates under the Fed's new operating procedure: the uneasy marriage
Interest rates and exchange rates under the Fed's new operating procedure: the uneasy marriage William L. Wilby Movements in the trade-weighted value of the dollar have exhibited a greatly increased sensitivity
More informationdr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw
Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Determinants of the demand for foreign currencies To understand what factors determine the exchange
More informationa) Answer parts (i)-(iii) assuming the following exchange rates hold: Exchange Rate (as US$ per foreign currency)
Econ 455 Lapan Spring 2001 FINAL EXAM Answer a total of three questions. Answer at most one question from Part II. {answer three questions from Part I or answer 2 questions from Part I and one question
More informationChapter 9. Forecasting Exchange Rates. Lecture Outline. Why Firms Forecast Exchange Rates
Chapter 9 Forecasting Exchange Rates Lecture Outline Why Firms Forecast Exchange Rates Forecasting Techniques Technical Forecasting Fundamental Forecasting Market-Based Forecasting Mixed Forecasting Guidelines
More informationChapter 2 Foreign Exchange Parity Relations
Chapter 2 Foreign Exchange Parity Relations Note: In the sixth edition of Global Investments, the exchange rate quotation symbols differ from previous editions. We adopted the convention that the first
More informationInternational Financial Markets Prices and Policies. Second Edition Richard M. Levich. Overview. ❿ Measuring Economic Exposure to FX Risk
International Financial Markets Prices and Policies Second Edition 2001 Richard M. Levich 16C Measuring and Managing the Risk in International Financial Positions Chap 16C, p. 1 Overview ❿ Measuring Economic
More informationInternational Macroeconommics
International Macroeconommics Chapter 3: Exchange Rate, The Monetary Approach in the Long Run Department of Economics, UCDavis Outline Goods Market Equilibrium: PPP 1 Goods Market Equilibrium: PPP 2 3
More informationChapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach
Chapter 14 Exchange Rates and the Foreign Exchange Market: An Asset Approach Copyright 2015 Pearson Education, Inc. All rights reserved. 1-1 Preview The basics of exchange rates Exchange rates and the
More information3. Money, Inflation, and Interest Rate Links with Currency Values
3. Money, Inflation, and Interest Rate Links with Currency Values Quantity Theory of Money... 1 Real and Nominal Interest Rates - The Impact of Expected Inflation... 4 Currency Values, Inflation, and Purchasing
More informationEMERGING CAPITAL MARKETS
EMERGING CAPITAL MARKETS Lecture 3: Foreign Exchange Determination and Forecasting Dr. Edilberto Segura Partner & Chief Economist, SigmaBleyzer Chairman, Advisory Board, The Bleyzer Foundation January
More informationChapter 6. The Open Economy
Chapter 6 0 IN THIS CHAPTER, YOU WILL LEARN: accounting identities for the open economy the small open economy model what makes it small how the trade balance and exchange rate are determined how policies
More informationDriving Forces Which Influence Exchange Rates in the Global Market
Driving Forces Which Influence Exchange Rates in the Global Market Monika Singh Chaudhary Assistant Professor, Department of Business Management, Shri Ram College of Engineering & Management, Haryana,
More information