international pverty

© All Rights Reserved

112 tayangan

international pverty

© All Rights Reserved

- Brock Wang Jiahui 2015
- IJAIEM-2014-03-05-013
- Stephen G Cecchetti
- Gross Domestic Product 2008, PPP
- International Finance Exam Solutions
- The 2011 ICP for Asia and the Pacific: Institutional Arrangements
- 1825490
- New Microsoft Word Document
- Delsa Hea Wd Hwp(2017)1
- EC563 Lecture 2 - International Finance
- Bassanini Reviglio Reducing Debt and Financing Long Term Investments 2
- Corperate Assign
- Pharmaceutical Project
- New Microsoft Power Point Presentation
- Exchange Rate Determination Model
- DavidsonNEXT EconomicConceptMap Dft1 Final
- asfsdaf
- Country Profiles.pdf
- importation of chicharon to the UK
- International Business Management

Anda di halaman 1dari 71

RELATIONSHIP

Types of Transactions

A spot trade is an agreement to

exchange currency "on the spot

The exchange rate on a spot trade is

called the spot exchange rate

A forward trade is an agreement to

exchange currency at some time in the

future.

The exchange rate that will be used is

agreed upon today and is called the

forward exchange rate.

Example 1

The spot exchange rate for the Swiss

franc is SF1 = $0.9188.

The

180-day

(6-month)

forward

exchange rate is SF1 = $0.9257.

This means that you can buy a Swiss

franc today for $0.9188, or

You can agree to take delivery of a

Swiss franc in 180 days and pay

$0.9257 at that time.

Example 1

The Swiss franc is more expensive in the

forward market ($0.9257 versus $0.9188).

Because the Swiss franc is more

expensive in the future than it is today, it

is said to be selling at a premium relative

to the dollar.

For the same reason, the dollar is said to

be selling at a discount relative to the

Swiss franc.

Example 2

Suppose the spot exchange rate and

the 180-day forward rate in terms of

dollars per pound are $1.8091 = 1

and $1.7974 = 1, respectively.

You expect 1million in 180 days, and

you agree to a forward trade to

exchange pounds for dollars.

Then you will get 1million X $1.7974

per pound = $1.7974 million.

Example 2

pound in the forward market than in

the spot market ($1.7974 versus

$1.8091), the pound is said to be

selling at a discount relative to the

dollar.

Covered Interest

Arbitrage

Let

S0 = Spot exchange rate

Ft = Forward exchange rate for

settlement at time t.

Rus = U.S. nominal risk-free interest

rate.

Rfc = Foreign country nominal riskfree interest rate.

Covered Interest

Arbitrage

Suppose we observe the following information

about U.S. and Swiss currencies in the market:

S0 = US$0.50 / SF1

Fl = US$0.53 / SF 1

iUS = 10% (home country)

is = 5%

where is is the nominal risk-free rate in

Switzerland.

The period is one year, so F1 is the 360-day

forward rate.

Covered Interest

Arbitrage

One option you have is to invest the

$1 in a riskless U.S. investment such

as a 360-day T-bill.

If you do this, then in one period your

$1 will be worth:

$ value in 1 period = $1 x (1 + iUS)

= $1.10

Covered Interest

Arbitrage

Alternatively, you can invest in the

Swiss risk-free investment

Convert your $1 to $1 / S0 = SF 2.00.

At the same time, enter into a forward

agreement to convert Swiss francs

back to dollars in one year. Because

the forward rate is US$0.53 /SF1, you

will get $0.53 for every SF1 that you

have in one year.

Covered Interest

Arbitrage

3. Invest your SF2.00 in Switzerland at is. In

one year you will have:

SF value in 1 year = SF 2.00 X (1 + is)

= SF2.00 X 1.05

= SF2.10

4. Convert your SF2.10 back to dollars at the

agreed-upon rate of US$1 = SF1

You end up with:

$ value in 1 year = SF2.10 x 0.53 = $1.113

Covered Interest

Arbitrage

The

return

on

investment

in

Switzerland is 11.3%

This is higher than the 10% return

from investment in the US.

There is an arbitrage opportunity and

it is called covered interest arbitrage.

There must be some relationship

between spot exchange rates, forward

exchange rates, and relative interest

rates as such that covered interest

arbitrage opportunities do not exist

In equilibrium, the forward rate differs

from the spot rate by a sufficient

amount

to

offset

the

interest

differential between two currencies.

As such:

1 + ih = [(1 + if) / S0] x F1

ih = interest rate in home country

if = interest rate in foreign country

Rearranging, we get interest rate

parity (IRP) condition:

F1 = S0 [(1 + ih) / (1 + if)]

p = [(1 + ih) / (1 + if)] - 1

Example 3

Suppose the exchange rate for Japanese

yen, S0, is currently US$0.0083 / I.

The interest rate in the United States

(home country) is ius = 10 percent

The interest rate in Japan is iJ = 5

percent

What must the forward rate be to

prevent covered interest arbitrage?

Answer

= 0.0083 (1.10 / 1.05)

= 0.00869

Answer

Forward premium:

p = [(1 + 0.10) / (1 + 0.05)] 1

= 0.0476

ih > if , so it must be forward premium

*S0 = 0.0083

F1 = 0.0083 x (1 + 0.0476) = 0.00869

Example 4

Suppose the exchange rate for Mexican

peso, S0, is currently US$0.10 / peso.

The interest rate in the United States

(home country) is ih = 5 percent

The interest rate in Mexico is if = 6

percent

What must the forward rate be to

prevent covered interest arbitrage?

Answer

= 0.10 (1.05 / 1.06)

= 0.09906

Answer

Forward premium:

p = [(1 + 0.05) / (1 + 0.06)] 1

= - 0.0094

ih < if , so it must be forward discount

*S0 = 0.10

F1 = 0.10 x (1 0.0094) = 0.09906

Exercise 1

The treasurer of a major U.S. firm has $30 million

to invest for three months.

The annual interest rate in the United States is

0.25 percent per month.

The interest rate in Great Britain is 0.41 percent

per month.

The spot exchange rate is 0.54, and the threemonth forward rate is 0.53.

Ignoring transaction costs, in which country

would the treasurer want to invest the company's

funds? Why?

Answer

three months, we will have:

Answer

If we invest in Great Britain, we must

exchange the dollars today for pounds,

and exchange the pounds for dollars in

three months. After making these

transactions, the dollar amount we

would have in three months would be:

Exercise 2

Question 7 (Ch. 7, Madura, 2012)

Assume the following information:

Spot rate of Mexican peso = US$0.10

180-day forward rate of Mexican peso

= US$0.098

180-day Mexican interest rate = 6%

180-day US interest rate = 5%

Question: Is covered interest arbitrage

worthwhile for Mexican investors who have

peso to invest?

Answer

Exercise 3

Question 17 (Ch. 7, Madura, 2012)

The 1-year interest rate in New Zealand is 6%.

The 1-year U.S. interest rate is 10%.

The spot rate of the New Zealand dollar (NZ$) is

US$0.50/NZ$1.

The forward rate of the New Zealand dollar is

US$0.54/NZ$1.

Questions:

Is covered interest arbitrage feasible for U.S.

investors?

Is it feasible for New Zealand investors?

Answer

Investment in New Zealand would

provide return of:

=

Answer

For New Zealand investors:

Direct Quotation:

Spot rate = 1/0.50 = NZ$2 / USD1

Forward rate = 1/0.54 = NZ$1.85 / USD1

Investment in U.S. would provide return

of:

=

Assignment

Chapter 7:

Q39, Q30, Q32, Q46

Blades, Inc. Case.

Purchasing Power

Parity

Purchasing Power of

Parity (PPP)

- Absolute Purchasing Power Parity

- Relative Purchasing Power Parity

Absolute Purchasing

Power Parity

The basic idea behind absolute purchasing

power parity is that a commodity costs the

same regardless of what currency is used to

purchase it or where it is selling.

If a bread costs 2 in London, and the exchange

rate is $1.67/ per dollar, then a bread costs 2

x 1.67 = $3.34 in New York.

Absolute PPP says that $1 will buy you the same

number of, say, cheeseburgers anywhere in the

world. (This concept is sometimes referred to as

the "law of one price. )

Absolute Purchasing

Power Parity

let S0 be the spot exchange rate between

the British pound and the U.S. dollar today

(time 0), and we are quoting exchange rates

as the amount of dollar per foreign

currency

Let Ph and Pf be the current home country

and foreign country prices, respectively, on

a particular commodity, say, apples

Absolute PPP simply says that:

Pf = 1/S0 X Ph

Absolute Purchasing

Power Parity

Suppose apples are selling in New York

for $4 per bushel, whereas in London the

price is 2.40 per bushel (assume U.S. is

the home country). Absolute PPP implies

that:

Puk = 1/S0 X Pus

2.40 = 1/S0 X $4

S0 = $4 / 2.40

= $1.67 /

Absolute Purchasing

Power Parity

be possible (in principle) if apples

were moved from one country to

another.

Absolute Purchasing

Power Parity

Suppose instead that the actual exchange

rate is $2/. Starting with $4, a trader

could buy a bushel of apples in New York,

ship it to London, and sell it there for 2.40.

The trader could then convert the 2.40

into dollars at the prevailing exchange rate,

$2/, yielding a total of 2.40 x 2 = $4.80.

The round-trip gain would be 80 cents.

Relative Purchasing

Power Parity

It tells us what determines the change in the

exchange rate over time.

Suppose the British pound-U.S. dollar exchange

rate is currently S0 = $2/.

Further suppose that the inflation rate in Britain

is predicted to be 10 percent over the coming

year, and (for the moment) the inflation rate in

the United States (home country) is predicted to

be zero.

What do you think the exchange rate will be in a

year?

Relative Purchasing

Power Parity

S0 = Current (Time 0) spot exchange rate

(per foreign currency).

E(S1) = Expected exchange rate in period 1.

Ih = Home country inflation rate.

If = Foreign country inflation rate.

S1 = S0 x [(1+Ih) / (1+If)]

Relative Purchasing

Power Parity

S1 = S0 x [(1+Ih) / (1+If)]

S1 = 2 x [(1+0) / (1+0.10)]

= $1.818/

Relative Purchasing

Power Parity

To compute percentage change in the

value of foreign currency:

ef = [(1+Ih) / (1+If)] 1

Ih > If , ef should be positive implying

foreign currency appreciates.

Ih < If , ef should be negative implying

foreign currency depreciates.

Relative Purchasing

Power Parity

ef = [(1+Ih) / (1+If)] 1

= (1/1.10) 1

= - 0.0909

Relative Purchasing

Power Parity

change in the exchange rate is

determined by the difference in the

inflation rates of the two countries.

Relative Purchasing

Power Parity

Example 1

Foreign country inflation rate is 3%

According to PPP, the foreign

currency will adjust as follow:

ef = [(1+Ih) / (1+If)] 1

= (1.05 / 1.03) 1

= 0.0194

Exercise 1

107 or 0.55.

If a TV in London costs 500, what

will that identical TV cost in Tokyo if

absolute purchasing power parity

exists?

Answer

Exercise 2

In the spot market, A$1 is currently

equal to $0.7042.

The expected inflation rate is 3 percent

in Australia and 2 percent in the U.S.

(assume U.S. is the home country).

What is the expected exchange rate

one year from now if relative

purchasing power parity exists?

Answer

Exercise 3

In the spot market, $1 is currently

equal to 0.55.

The expected inflation rate in the U.K.

is 4 percent and in the U.S. 3 percent

(assume U.S. is the home country).

What is the expected exchange rate

two years from now if relative

purchasing power parity exists?

Answer

Exercise 4

QUESTION 41 (Ch.8, Madura, 2012)

Boston Co. will receive 1 million euros in 1 year from

selling exports. It did not hedge this future transaction.

Boston believes that the future value of the euro will be

determined by purchasing power parity (PPP). It expects

that inflation in countries using the euro will be 12

percent next year, while inflation in the United States will

be 7 percent next year. Today the spot rate of the euro is

$1.46, and the 1-year forward rate is $1.50.

receive in 1 year when converting its euro receivables

into U.S. dollars.

Answer

Assignment

Chapter 8:

Q35, Q32

International Fisher

Effect

Fisher Effect

The relationship between a country's nominal

interest rate and inflation.

The Fisher effect suggests that the nominal

interest rate contains two components:

(1) expected inflation rate and (2) real rate of

interest.

The real rate of interest represents the return on

the investment to savers after accounting for

expected inflation.

Real rate of interest = nominal interest rate

expected inflation rate

International Fisher

Effect

The international Fisher (IFE) effect involves

two steps when attempting to predict

exchange rate movements between two

countries:

(1) applying the Fisher effect to estimate

the expected inflation for each country and

(2) relying on purchasing power parity

theory (PPP) to estimate how the difference

in expected inflation will affect the

exchange rate.

Example 1

Assume that the real rate of interest is 2 percent in

Canada and is also 2 percent in the United States.

Assume the 1-year nominal interest rate is 13 percent

in Canada versus 8 percent in the United States.

Based on the Fisher effect, the expected inflation rate

over the next year for Canada is 13% - 2% = 11%.

For the United States, the expected inflation rate is

8% 2% = 6%.

Thus, the differential in expected inflation between

the two countries is 11 % - 6% = 5%.

Example 1

(Notice that this differential in expected

inflation between the two countries is

equal to the differential in nominal interest

rates (13% 8% = 5%) between the two

countries.)

Since the expected inflation is 5 percent

higher in Canada, the Purchasing Power

Parity suggests that the Canadian dollar

should depreciate against the U.S. dollar

by about 5 percent.

International Fisher

Effect

with high interest rates will have high

expected inflation (due to Fisher

effect).

The relatively high inflation will cause

the currencies to depreciates (due to

PPP effect).

Example 2

The nominal interest rate is 8 percent in the

United States and 5 percent in Japan.

Assume the real rate of interest is 2 percent

in each country.

The U.S. inflation rate is expected to be 6

percent, while the inflation rate in Japan is

expected to be 3 percent.

According to PPP theory, the Japanese yen is

expected to appreciate by the expected

inflation differential of 3 percent.

Example 2

If the exchange rate changes as expected,

Japanese investors who attempt to capitalize on the

higher U.S. interest rate will earn a return similar to

what they could have earned in their own country.

Though the U.S. interest rate is 3 percent higher

than the Japanese interest rate, the Japanese

investors will repurchase their yen at the end of the

investment period for 3 percent more than the

price at which they initially exchanged yen for

dollars. Therefore, their return from investing in the

United States is no better than what they would

have earned domestically.

International Fisher

Effect

According to the IFE, the effective return on a foreign

investment should, on average, be equal to the

interest rate on a local money market investment.

To make the investment in both countries generate

similar returns, the foreign currency must change by:

ef = [(1 + ih) / (1 + if)] 1

when ih > if, ef will be positive and as such foreign

currency will appreciate.

when ih < if, ef will be negative and as such foreign

currency will depreciate

Exercise

Assume that the spot exchange rate

of the Singapore dollar is $0.70.

The 1-year interest rate is 11 percent

in the United States and 7 percent in

Singapore.

What will the spot rate be in 1 year

according to the IFE?

Answer

Future Spot Rates

forward rate and the expected future

spot rate?

the unbiased forward rates (UFR)

condition says that, on average, the

forward exchange rate is equal to the

future spot exchange rate.

Future Spot Rates

condition says that the forward rate.

F1 is equal to the expected future

spot rate, E(S1):

F1 = E(S1)

With t periods, UFR would be written

as:

Ft = E(St)

Future Spot Rates

Suppose the forward rate for the Japanese

yen is consistently lower than the future

spot rate by, say, 10 yen.

This means that anyone who wanted to

convert dollars to yen in the future would

consistently get more yen by NOT agreeing

to a forward exchange.

Then, the forward rate would have to rise to

get anyone interested in a forward

exchange.

Future Spot Rates

consistently higher than the future

spot rate, then anyone who wanted

to convert yen to dollars would get

more dollars per yen by NOT

agreeing to a forward trade.

The forward exchange rate would

have to fall to attract such traders.

Assignment

Chapter 8:

Q37

Blades, Inc. Case

- Brock Wang Jiahui 2015Diunggah olehAlexandra-Nicoleta Mateescu
- IJAIEM-2014-03-05-013Diunggah olehAnonymous vQrJlEN
- Stephen G CecchettiDiunggah olehapi-26691457
- Gross Domestic Product 2008, PPPDiunggah olehsebmusonda
- International Finance Exam SolutionsDiunggah olehCijara
- The 2011 ICP for Asia and the Pacific: Institutional ArrangementsDiunggah olehAsian Development Bank
- 1825490Diunggah olehsumedh11sept
- New Microsoft Word DocumentDiunggah olehausmelt2009
- Delsa Hea Wd Hwp(2017)1Diunggah olehGuillermo Ponce Alfaro
- EC563 Lecture 2 - International FinanceDiunggah olehOisín Ó Cionaoith
- Bassanini Reviglio Reducing Debt and Financing Long Term Investments 2Diunggah olehantonio.feynmann
- Corperate AssignDiunggah olehKok Hooi Au
- Pharmaceutical ProjectDiunggah olehRajbeer Singh Ishar
- New Microsoft Power Point PresentationDiunggah olehRajesh Ks
- Exchange Rate Determination ModelDiunggah olehfahimrahman999
- DavidsonNEXT EconomicConceptMap Dft1 FinalDiunggah olehandernick
- asfsdafDiunggah olehbtcong93
- Country Profiles.pdfDiunggah olehWilly Fandri
- importation of chicharon to the UKDiunggah olehzeachua
- International Business ManagementDiunggah olehRajesh Jagadeesan
- Introduction to MacroeconomicsDiunggah olehupf123
- c15Diunggah olehrgerwwaa
- Chapter 6 - Hedging foreign exchange risk.pptxDiunggah olehHay Jirenyaa
- Ekonomi Internasioanl Dan AK IIDiunggah olehDwi Aryasa
- parity condition in international finance.pdfDiunggah olehDyah Puji Astutik
- Eun8e_Ch_006_PPTDiunggah olehArinYuniastikaEkaPutri
- Exchange Rate Deregulation and Nigeria’s Industrial Output (1970-2015)Diunggah olehAJHSSR Journal
- Grade 10 2nd Prelim, Paper 2, Markscheme, 2018-19Diunggah olehMohammed Ishaaq
- 2017_theworldstop10economies.pdfDiunggah olehFanny Montes
- Forex Management PR.docDiunggah olehswati gupta

- Management Control System.pdfDiunggah olehAdnan Munir
- Presentation 1Diunggah olehwanimtiaz9150
- Syllabus BWFF5043 A152Diunggah olehwanimtiaz9150
- Blades Inc Case of IFMDiunggah olehimaal
- Factors Influcing the Exchange RateDiunggah olehadwait_15
- 6510-20498-1-PBDiunggah olehwanimtiaz9150
- CalendarDiunggah olehSaya Farez
- IT Project Success Factors From an Experience ReportDiunggah olehwanimtiaz9150
- Topic 1 for Students Foreign Exchange Markets and Exchange Rates (1)Diunggah olehwanimtiaz9150
- Topic 2 Exchange Rate DeterminationDiunggah olehwanimtiaz9150
- aca_calendar2010-2011Diunggah olehazrinamz
- jqaf_dis2013_kelasDiunggah olehHoney Bun

- A Study on Customer Relationship Management Practices in Selected Private Sector Banks With Reference to Coimbatore DistrictDiunggah oleharcherselevators
- CSModule 5-7Diunggah olehPZ
- Learning From High-Potential VenturesDiunggah olehDavid 'Valiant' Onyango
- 9780273760993_pp02Diunggah olehghighilan
- mcx_factsheet_2016Diunggah olehProfit Circle
- 1952565416_guidelines for InspectionDiunggah olehdineshmarginal
- Interest Rate Swaps Basics 1-08 USDiunggah olehbhagyashreesk
- Economics of LibertyDiunggah olehJojo Gee
- parachutepayments_examplesDiunggah olehaxispointdb
- chopra4_ppt_ch08Diunggah olehTia Mejia
- Fboboa Cir 06 2019Diunggah olehAnoop Yadav
- WharehousingDiunggah olehkkv_phani_varma5396
- Internship Report on AKRSPDiunggah olehhaikel jan
- Great BurgerDiunggah olehalmighty777
- CMA Australia Acquires Meretec AssetsDiunggah olehforespoke
- CS Form No. 7 NEW Clearance Form 2Diunggah olehIan Auro
- ObjectivesDiunggah olehBintang Meister
- Chapter 2 - Project SelectionDiunggah olehPraveen Sharma
- EY Product InterventionDiunggah olehedpaala
- 6e SM Module02.pptDiunggah olehjaddu
- ENRIQUE-C-Copy.docxDiunggah olehIrish Martinez
- Washington Foreclosure Prevention Resource Guide June 2015Diunggah olehKaren Pooley
- Personal Selling: Preparation and ProcessDiunggah olehsumit negi
- TYPES-OF-MAJOR-ACCOUNTS.pptxDiunggah olehRomeo C. Ponsica III
- Financial /Ratios AnalysisDiunggah olehNyeko Francis
- Financial Projections Model v6.8.4Diunggah oleholumuleromopa
- Ministry of AgricultureDiunggah olehharry_chem
- A Reveiw of the Earnings Managemnet Literature and Its Implications for Standard SettingsDiunggah olehrahulnanda87
- Spring Singapore ICV GrantDiunggah olehwaggishlid5303
- Metal Service IntroductionDiunggah olehronak2484bhavsar

## Lebih dari sekadar dokumen.

Temukan segala yang ditawarkan Scribd, termasuk buku dan buku audio dari penerbit-penerbit terkemuka.

Batalkan kapan saja.