Condition: Bon. Petite s trace s de pliure sur la couverture. Salissures sur la tranche. Edition Former library book. Slightly creased cover. Slight signs of wear on the cover.
Soiling on the side. Used Condition: Good. Small annotations in pen inside the front cover. Good condition is defined as: a copy that has been read but remains in clean condition. All of the pages are intact and the cover is intact and the spine may show signs of wear. The book may have minor markings which are not specifically mentioned. Most items will be dispatched the same or the next working day. Used - Softcover Condition: Used; Good.
Condition: Used; Good. Fast Dispatch. Expedited UK Delivery Available. Excellent Customer Service. Eighth edition. Seller: GF Books, Inc. Satisfaction Guaranteed! Book is in Used-Good condition.
Pages and cover are clean and intact. Used items may not include supplementary materials such as CDs or access codes.
May show signs of minor shelf wear and contain limited notes and highlighting. Used - Softcover Condition: UsedAcceptable. Condition: UsedAcceptable. Published by Thomson Learning, New - Softcover Condition: New. Condition: New. Published by Cengage Learning Emea, Used - Softcover. From Germany to U. Published by South-Western Publishing, From Singapore to U. Soft cover. Used book in good condition. Ships with tracking and packaged with care. Buy with confidence, excellent customer service!.
Zust: Gutes Exemplar. Englisch g. Published by South-Western Cengage Learning, Soft Cover. Dust Jacket Condition: As New.
Published by South Western College, Used - Acceptable. Ex-library with wear and barcode page may have been removed. Our donations to The Rainbow Centre have helped provide an education and a safe haven to hundreds of children who live in appalling conditions.
Diamond Bank should not pursue this strategy. Should diamond bank pursue this strategy??? The rate to be paid on loan is. Diamond bank should not pursue this strategy. The following interbank lending and borrowing rates exist: U.
How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. Borrow MXP70 million 2. Lend the dollars through the interbank market at 8. Repay the peso loan. How could it attempt to capitalize on its expectations without using deposited funds? Lend the pesos through the interbank market at 8.
Repay the dollar loan. Convert the pesos to dollars to repay the loan. Aggregate Effects on Exchange Rates. Assume that the United States invests heavily in government and corporate securities of Country K.
In addition, residents of Country K invest heavily in the United States. This information is expected to also hold in the future. Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country Ks currency the k rank with respect to the dollar. Explain how each of the following conditions will affect the value of the k rank, holding other things equal.
Then, aggregate all of these impacts to develop an overall forecast of the k ranks movement against the dollar. Decreased supply of k ranks for sale. Upward pressure in the k ranks value. Investors of both countries are attracted to high interest rates. Increased supply of k ranks for sale. Downward pressure on the k ranks value. The U. Upward pressure on the kranks value. Combine all expected impacts to develop an overall forecast.
However, these scenarios are related to trade, and trade flows are relatively minor between the U. The interest rate scenario places downward pressure on the k ranks value. Since the interest rates affect capital flows and capital flows dominate trade flows between the U. Thus, when considering the importance of implications of all scenarios, the krank is expected to depreciate. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States.
Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.
Identify the most obvious economic reason for the persistent depreciation of the peso. High interest rates are commonly expected to strengthen a countrys currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency.
Yet, the pesos value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U. Thus, it appears that the high Mexican interest rates do not attract substantial U. Why do you think U. That is, the real interest rate in Mexico may not be any higher than the U. Given the high inflationary expectations, U. Therefore, the high Mexican interest rates do not encourage U.
How does this affect a U. Case Problem: Blades, Inc. How are percentage changes in a currencys value measured? A positive percentage change represents appreciation of the foreign currency, while a negative percentage change represents depreciation. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors? ANSWER: The basic factors that determine the value of a currency are the supply of the currency for sale and the demand for the currency.
A high level of supply of a currency generally decreases the currencys value, while a high level of demand for a currency increases its value. In equilibrium, the supply of the currency equals the demand for the currency. How might the relatively high levels of inflation and interest rates have affected the baths value? Assume a constant level of U. A high level of inflation tends to result in currency depreciation, as it would increase the Thai demand for U. Furthermore, a relatively high level of Thai inflation would reduce the U.
Conversely, the high level of interest rates in Thailand may cause appreciation of the baht relative to the dollar. A relatively high level of interest rates in Thailand would have rendered investments there more attractive for U. Furthermore, U. However, investors might be unwilling to invest in baht-denominated securities if they are concerned about the potential depreciation of the baht that could result from Thailands inflation. Speculators who are confident that the exchange rate will appreciate, with very little risk of depreciation, may be more willing to buy futures than call options, because they do not need to insure against depreciation.
However, speculators who expect appreciation but want to cover against possible depreciation may be willing to buy call options so that their downside risk is limited to what they pay for the call option.
How do yiu think the loss of confidence in the Thai bath evidenced by the withdrawal of funs from Thailand, will affect the baths value?? Would blades be affected by the changes in value, given the primary Thai customers commitment?? Answer: In general, depreciation in the foreign currency results when investors liquidate their investments in the foreign currency, increasing the supply of its currency or sale.
Blades would probably be affected by the change in value, as the sales are denominated in bath. Assume the Thailands central bank wishes to prevent a withdrawal of fund from its country in order to prevent further changes in the currencys value. How could it accomplish this objectives using interest rates??
Answer: If Thailands central bank wishes to prevent further depreciation in the baths value, it would attempt to increase the level of interest rates in Thailand. In turn , this would increase the demand for Thai by US investors as Thai securities would now seem more attractive. This would place upward pressure on the currencys value. Small Business Dilemma: 1. Given Jims Expectations, forecast whether the pound will appreciate or depreciate against the dollar over time???
Answer: The pound should depreciate because the British inflation is expected to be higher the US inflation. This could cause a shift in trade that would place downward pressure on the pounds value. The interest rate movements of both countries are expected to be similar for both countries. Therefore, there should not be any adjustment in the capital flows between the two countries. Given Jims expectations, will the sports exports company be favorable or unfavorably affected by the future changes in the value of pound??
Answer: The sports export company will be unfavorably affected, because depreciation in the British pound will cause the pound receivable to convert into fewer dollars. Chapter 5: Currency Derivatives 1. Selling Currency Call Options. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume that there are 50, units in a Canadian dollar option. What was Mike s net profit on the call option?
Hedging with Currency Derivatives. Assume that all expenses will be paid by the British government, and that the team will receive a check for 1 million pounds. The team anticipates that the pound will depreciate substantially by the scheduled date of the game. In addition, the National Football League must approve the deal, and approval or disapproval will not occur for three months.
How can the team hedge its position? What is there to lose by waiting three months to see if the exhibition game is approved before hedging? ANSWER: The team could purchase put options on pounds in order to lock in the amount at which it could convert the 1 million pounds to dollars.
The expiration date of the put option should correspond to the date in which the team would receive the 1 million pounds. If the deal is not approved, the team could let the put options expire. If the team waits three months, option prices will have changed by then. If the pound has depreciated over this three-month period, put options with the same exercise price would command higher premiums.
Therefore, the team may wish to purchase put options immediately. The team could also consider selling futures contracts on pounds, but it would be obligated to exchange pounds for dollars in the future, even if the deal is not approved. Speculating with Put Currency Options. Assume there are 31, units in a British pound option. What was Alice s net profit on the option? Speculation with Currency Put Option. It has forecasted the Australian dollars lowest level over the period of concern as shown in the following table.
Determine the net profit or loss per unit to Buildog Inc, if each level occurs and the put options are exercised at that time. Speculating with Currency Call Options. What was Randy s net profit on this option?
Speculating with currency call option: Bama Corp has British pound call options for speculative purposes. Bama will purchase the pounds on the day the options the options are exercised if the options are exercised in order to fulfill its obligation.
In the following table, fill in the net profit or loss to Barma corp, if the listed spot rate exists at the time the purchaser of the call options considers exercising them.
Auburn Co will purchase the Canadian dollar just before it exercises the options If it is feasible to exercise the options. It plans to wait until the expiration date before deciding whether to exercise the options. In the following table, fill in the net profit or loss per unit to Auburn Co based on the listed possible spot rates of the Canadian dollar on the expiration date.
Describe the tradeoff. The option premium is higher than what the firm normally prefers to pay. This alternative option does not achieve the firm s desire to ensure paying no more than 5 percent above the existing spot rate.
So if the firm is to continue to use options, it must accept either paying a higher premium than it would prefer, or a higher exercise price that limits the Brac University. Chapter 6: Government Influence on Exchange Rates 1. Indirect Intervention. Why would the Feds indirect intervention have a stronger impact on some currencies than others? Why would a central banks indirect intervention have a stronger impact than its direct intervention?
Answer: Intervention may have a more pronounced impact when the market f o r a g i v e n currency is less active, such that the intervention can jolt the supply and demand conditions more.
C o n v e r s e l y, d i r e c t i n t e r v e n t i o n i s a superficial method of affecting the demand and supply conditions for a currency, and could be over whelmed by market forces.
During the Asian crisis, some Asian central banks raised their in terest rates to prevent their currencies from weakening. Yet, the currencies weakened anyway. Offer your opinion as to why the central banks efforts at indirect intervention did not work. ANSWER: The higher interest rates did not attract sufficient funds to offset the outflow of funds, as investors had no confidence that the currencies would stabilize and were unwilling to invest in Asia.
Feedback Effects. Explain the potential feedback effects of a currencys changing value on inflation. Answer: A weak home currency can cause inflation since it tends to reduce f o r e i g n competition within any given industry. Higher inflation can weaken the currency further since it encourages consumers to purchase goods abroad where prices are not inflated.
A strong home currency can reduce inflation since it reduces the prices of foreign goods and forces home producers to offer competitive prices. Low inflation, in turn, places upward pressure on the home currency. Freely Floating Exchange Rates.
What would be the advantages of letting their currencies float freely? What would be the disadvantages? Answer: A freely floating currency may allow the exchange rate to adjust to market conditions, which can stabilize flows of funds between countries. If there is a larger amount of funds going out versus coming in, the exchange rate will weaken due to the forces and the flows may change because the currency has become cheaper; this discourages further outflows.
Yet, a disadvantage is that speculators may take positions that force a freely floating currency to deviate far from what is perceived to be a desirable exchange rate. What is the impact of a strong home currency on the home economy, other things being equal? Answer: A weak home currency tends to increase a countrys exports and decrease its imports, thereby lowering its unemployment.
However, it also can cause higher inflation since there is a reduction in foreign competition because a weak home currency is not worth much in foreign countries. Thus, local producers can more easily increase prices without concern about pricing themselves out of the market.
Local producers must maintain low prices to remain competitive. However, a strong home currency can increase unemployment in the home country. Effects of Indirect Intervention. Suppose that the government of Chile reduces one of its key interest rates.
The values of several other Latin American currencies are expected to change substantially against the Chilean peso in response to the news. Explain why other Latin American currencies could be affected by a cut in Chiles interest rates. Answer: Exchange rates are partially driven by relative interest rates of the countries of concern.
When Chile's interest rates decline, there is a smaller flow of funds to be exchanged into Chilean pesos because the Chile interest rate is not as attractive to investors. There may be a shift of investment into the other Latin American countries where interest rates have not declined. However, if these Latin American countries are expected to reduce their rates as well, they will not attract more capital and may even attract less capital flows in the future, which could reduce their values.
How would the currencies of these countries respond to the central bank interventions? Answer: The central banks would likely attempt to lower interest rates, which causes the currency to weaken. A weaker currency and lower interest rates can stimulate the economy. How would a U. Assume the exports are denominated in the corresponding Latin American currency for each country.
Answer: The exporter is adversely affected if the Chilean peso and other currencies depreciate. It is favorably affected by the appreciation of any Latin American currencies.
Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U. What about U. Answer: The Federal Reserve would normally consider a loose money policy to stimulate the economy. However, to the extent that the policy puts upward pressure on economic growth and inflation, it could weaken the dollar.
A weak dollar is expected to favorably affect U. Sterilized Intervention. Explain the difference between sterilized and non sterilized intervention. Answer: Sterilized intervention is conducted to ensure no change in the money supply while non sterilized intervention is conducted without concern about maintaining the same money supply. How can a central bank use indirect intervention to change the value of a currency? Answer: To increase the value of its home currency, a central bank could attempt to increase interest rates, thereby attracting a foreign demand for the home currency to buy high yield securities.
To decrease the value of its home currency, a central bank could attempt to lower interest rates in order to reduce demand for the home currency by foreign investors.
Direct Intervention in Europe. If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth? Answer: The ECB could sell euros in the foreign exchange market, which may cause the euro to depreciate against other currencies, and therefore cause an increase in the demand for European imports. Direct Intervention. How can a central bank use direct intervention to change the value of a currency?
Explain why a central bank may desire to smooth exchange rate movements of its currency. Answer: Central banks can use their currency reserves to buy up a specific currency in the foreign exchange market in order to place upward pressure on that currency.
Central banks can also attempt to force currency depreciation by flooding the market with that specific currency selling that currency in the foreign exchange market in exchange for other currencies.
Abrupt movements in a currencys value may cause more volatile business cycles, and may cause more concern in financial markets and therefore more volatility in these markets. Central Brac University. Intervention Effects on Bond Prices. If the Fed planned to use intervention to weaken the dollar, how might bond prices be affected? Higher inflation tends to place upward pressure on interest rates.
Because there is an inverse relationship between interest rates and bond prices, bond prices would be expected to decline. Such an expectation causes bond portfolio manage rs to liquidate some of their bond holdings, thereby causing bond prices to decline immediately. Intervention with Euros. Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the dollar.
Can it apply central bank intervention to achieve this objective? Belgium is subject to the intervention decisions of the ECB. Effects on Currencies Tied to the Dollar. The Hong Kong dollars value is tied to the U. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: a Hong Kong exports to Japan and b Hong Kong exports to the United States. Answer: a. Hong Kong exports to Japan should increase because the yen will have appreciated against the H o n g K o n g d o l l a r.
Hong Kong exports to the U. Therefore, some U. This answer assumes that Japanese exporters did not reduce their prices to compensate U. If Japanese exporters do reduce their prices to fully offset the effect of the stronger yen, there would be less of a shift to Hong Kong goods. Exchange Rate Systems.
Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system? Under a freely floating system, government intervention would be non-existent.
Under a managed float system, governments will allow exchange rates move according to market forces; however, they will intervene when they believe it is necessary. A freely floating system may help correct balanceof-trade deficits since the currency will adjust according to market forces.
Also, countries are more Brac University. Also, floating rates still can often have a significant adverse impact on a countrys unemployment or inflation. Pegged Currency and International Trade. Assume that Canada decides to peg its currency the Canadian dollar To the US dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the Us and Mexico.
The US commonly obtains its imports from Canada and Mexico. Mexico commonly obtains its imports from US and Canada. The traded products are always invoiced in the exporting countrys currency. Assume that the Mexican peso appreciates substantially against the US dollar during the nest year. What is the likely effect if Any of the pesos exchange rate movement on the volume of Canadas export to Mexico?
What is the likely effect if any of the pesos exchange rate movement on the volume of Canadas export to the United States? Covered Interest Arbitrage in Both Directions. The day interest rate in the U. The day interest rate in Morocco is 2 percent.
What is the yield to a U. Did covered interest arbitrage work for the investor in this case? Would covered interest arbitrage be possible for a Moroccan investor in this case? Covered interest arbitrage would involve the following steps: 1. Deposit the dirham in a Moroccan bank for 60 days. You will have MD 4,, In 60 days, convert the dirham back to dollars at the forward rate and receive MD4,, Covered interest arbitrage did not work for the investor in this case.
The lower Moroccan forward rate more than offsets the higher interest rate in Morocco. Yes, covered interest arbitrage would be possible for a Moroccan investor. The investor would convert dirham to dollars, invest the dollars at a 1 percent interest rate in the U. Even though the Moroccan investor would earn an interest rate that is 1 percent lower in the U. Assume that the existing U. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium?
If Canadian investors attempt covered interest arbitrage, what will be their return? Canadian investors would earn a return of 11 percent using covered interest arbitrage, the same as they would earn in Canada. Deriving the Forward Rate. Assume that annual interest rates in the U. According to IRP, what should the forward rate premium or discount of the euro be?
Inflation Effects on the Forward Rate. Why do you think currencies of countries with high inflation rates tend to have forward discounts? ANSWER: These currencies have high interest rates, which cause forward rates to have discounts as a result of interest rate parity.
Covered Interest Arbitrage. The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the U. Based on this information, is covered interest arbitrage possible for a U. Although the investor can lock in the higher exchange rate in one year, interest rates are 3 percent lower in South Africa. Interest Rate Parity.
Explain the concept of interest rate parity. Provide the rationale for its possible existence. ANSWER: Interest rate parity states that the forward rate premium or discount of a currency should reflect the differential in interest rates between the two countries.
If interest rate parity didn't exist, covered interest arbitrage could occur in the absence of transactions costs, and foreign risk , which should cause market forces to move back toward conditions which reflect interest rate parity. The exact formula is provided in the chapter. Assume that the annual U. The Euros one-year forward rate currently exhibits a discount of 2 percent. Does interest rate parity exist? Can a U. Can a German subsidiary of a U. Effects of September The terrorist attack on the U.
Explain how such expectations could have affected U. Therefore, the forward premium on foreign currencies increased. Limitations of Covered Interest Arbitrage. Assume that the one-year U. Assume that a U. Would covered interest arbitrage be worth considering? Is there any reason why you should not attempt covered interest arbitrage in this situation? Ignore tax effects.
Explain your answer. ANSWER: To answer this question, begin with an assumed amount of pesos and determine the yield to Mexican investors who attempt covered interest arbitrage.
Thus, it is worthwhile for them. The one-year interest rate in New Zealand is 6 percent. The one-year U. Is covered interest arbitrage feasible for U. Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
The Canadian dollar's spot rate should rise, and its forward rate should fall; in addition, the Canadian interest rate may fall and the U. Changes in Forward Premiums. Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?
Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible. ANSWER: Covered interest arbitrage involves the short-term investment in a foreign currency that is covered by a forward contract to sell that currency when the investment matures.
Covered interest arbitrage is plausible when the forward premium does not reflect the interest rate differential between two countries specified by the interest rate parity formula.
If transactions costs or other considerations are involved, the excess profit from covered interest arbitrage must more than off set these other considerations for covered interest arbitrage to be plausible.
If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U. Do you agree or disagree with this statement? If at any point in time, Interest rate parity does not exist, covered interest arbitrage could earn excess returns unless transactions costs, tax differences, etc.
Triangular Arbitrage. What market forces would occur to eliminate any further possibilities of triangular arbitrage? Thus, the actual value of the Canadian dollars in terms of New Zealand dollars is more than what it should be. One could obtain Canadian dollars with U.
The value of the Canadian dollar with respect to the New Zealand dollar would decline. The value of the New Zealand dollar with respect to the U. Assume that the Japanese yens forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. Why might we expect the premium to change? We would expect the premium to change because as U. The return earned by U. Thus, there is downward pressure on the forward premium. Explain the concept of triangular arbitrage and the scenario necessary for it tobe plausible.
ANSWER: Triangular arbitrage is possible when the actual cross exchange rate between two currencies differs from what it should be. The appropriate cross rate can be determined given the values of the two currencies with respect to some other currency. Consider investors who invest in either U. Assume zero transaction costs and no taxes. If interest rate parity exists, then the return for U. Treasury bills. Is this statement true or false? If false, correct the statement.
If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills. Locational Arbitrage.
Given this information, is locational arbitrage possible? What market forces would occur to eliminate any further possibilities of locational arbitrage?
The large demand for New Zealand dollars at Yardley Bank will force this bank's ask price on New Zealand dollars to increase. The large sales of New Zealand dollars to Brac University. Beal Bank will force its bid price down. Once the ask price of Yardley Bank is no longer less than the bid price of Beal Bank, locational arbitrage will no longer be beneficial. Why would U. ANSWER: If the forward premium on Euros more than offsets the lower interest rate, investors could use covered interest arbitrage by investing in Euros and achieve higher returns than in the U.
Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. Specifically, the ask rate at one location must be lower than the bid rate at another location.
The disparity in rates can occur since information is not always immediately available to all banks. If a disparity does exist, Locational arbitrage is possible; as it occurs, the spot rates among locations should become realigned. Explain the theory of purchasing power parity PPP.
Based on this theory, what is a general forecast of the values of currencies in countries with high inflation? If inflation in a foreign country differs from inflation in the home country, the exchange rate will adjust to maintain equal purchasing power. Currencies in countries with high inflation will be weak according to PPP, causing the purchasing power of goods in the home country versus these countries to be similar. Rationale of PPP.
Explain the rationale of the PPP theory. In addition, that countrys demand for foreign goods should increase. Thus, the home currency of that country will weaken; this tendency should continue until the currency has weakened to the extent that foreign countrys goods are no more attractive than the home countrys goods.
Inflation differentials are offset by exchange rate changes. Testing PPP. Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds. ANSWER: One method is to choose two countries and compare the inflation differential to the exchange rate change for several different periods. Then, determine whether the exchange rate changes were similar to what would have been expected under PPP theory.
A second method is to choose a variety of countries and compare the inflation differential of each foreign country relative to the home country for a given period. Then, determine whether th exchange rate changes of each foreign currency were what would have been expected based on the inflation differentials under PPP theory. A limitation in testing PPP is that the results will vary with the base period chosen. The base period should reflect an equilibrium position, but it is difficult to determine when such a period exists.
Inflation differentials between the U. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent or more. What does this information suggest about PPP?
ANSWER: The information suggests that there are other factors besides inflation differentials that influence exchange rate movements. Thus, the exchange rate movements will not necessarily conform to inflation differentials, and therefore PPP will not necessarily hold. Thus, exchange rates will not move in perfect tandem with. In addition, there may not be substitutes for traded goods.
Therefore, even when a countrys inflation increases, the foreign demand for its products will not necessarily decrease in the manner suggested by PPP if substitutes are not available. Implications of IFE. Explain the international Fisher effect IFE. What is the rationale for the existence of the IFE?
What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.
The rationale is that if a particular currency exhibits a high nominal interest rate, this may reflect a high anticipated inflation. Thus, the inflation will place downward pressure on the currencys value if it occurs. The implications are that a firm that consistently purchases foreign Treasury bills will on average earn a similar return as on domestic Treasury bills.
The IFE may not hold because exchange rate movements react to other factors in addition to interest rate differentials. Therefore, an exchange rate will not necessarily adjust in accordance with the nominal interest rate differentials, so that IFE may not hold.
What does this suggest about the future strength or weakness of the dollar based on the IFE? Should U. Should foreign investors invest in U. Consequently, foreign investors who purchased U. Comparing Parity Theories.
Compare and contrast interest rate parity discussed in the previous chapter , purchasing power parity PPP , and the international Fisher effect IFE. ANSWER: Interest rate parity can be evaluated using data at any one point in time to determine the relationship between the interest rate differential of two countries and the forward premium or discount. PPP suggests a relationship between the inflation differential of two countries and the percentage change in the spot exchange rate over time.
IFE suggests a relationship between the interest rate differential of two countries and the percentage change in the spot exchange rate over. IFE is based on nominal interest rate differentials, which are influenced by expected inflation. Real Interest Rate.
One assumption made in developing the IFE is that all investors in all countries have the same real interest rate. What does this mean? If all investors require the same real return, then the differentials in nominal interest rates should be solely due to differentials in anticipated inflation among countries. Interpreting Inflationary Expectations. What do these inflationary expectations suggest about future exchange rates? Answer: PPP Applied to the Euro.
Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the Euros value against the dollar be affected?
According to the PPP theory, the euro's value would adjust in response to the weighted inflation rates of the European countries that are represented by the euro relative to the inflation in the U.
If the European inflation rises, while the U. Source of Weak Currencies. Currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why dont all U. PPP theory would suggest that currencies of these countries will depreciate against the U. The high inflation discourages demand for Latin American imports and places downward pressure in their Latin American currencies.
Depreciation of the currencies offsets the increased prices on Latin American goods from the perspective of importers in other countries. Interest rate parity forces the forward rates to contain a large discount due to the high interest rates in Latin America, which reflects a disadvantage of hedging these currencies.
The decision to hedge makes more sense if the Brac University. Also, keep in mind that some remittances cannot be perfectly hedged anyway because the amount of future remittances is uncertain. Japan has typically had lower inflation than the United States.
How would one expect this to affect the Japanese yens value? Why does this expected relationship not always occur? Yet, other factors can sometimes offset this pressure. For example, Japan heavily invests in U. Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and the PPP theory, describe the expected nominal return to U.
0コメント