Loading...

Messages

Proposals

Stuck in your homework and missing deadline? Get urgent help in $10/Page with 24 hours deadline

Get Urgent Writing Help In Your Essays, Assignments, Homeworks, Dissertation, Thesis Or Coursework & Achieve A+ Grades.

Privacy Guaranteed - 100% Plagiarism Free Writing - Free Turnitin Report - Professional And Experienced Writers - 24/7 Online Support

Interest rate parity theory ppt

15/11/2021 Client: muhammad11 Deadline: 2 Day

Multinational Financial Management

International Finance Multiple Choice Questions,

*

CHAPTER 4
PARITY CONDITIONS AND
CURRENCY FORECASTING

*

CHAPTER OVERVIEW
I. ARBITRAGE AND THE LAW OF

ONE PRICE

II. PURCHASING POWER PARITY

III. THE FISHER EFFECT

IV. THE INTERNATIONAL FISHER EFFECT

V. INTEREST RATE PARITY THEORY

VI. THE RELATIONSHIP BETWEEN THE FORWARD AND FUTURE SPOT RATE

VII. CURRENCY FORECASTING

*

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.

*

ARBITRAGE AND THE LAW OF ONE PRICE

B. Theoretical basis:

If the price after exchange-rate

adjustment were not equal, arbitrage in the goods worldwide ensures eventually it will.

*

ARBITRAGE AND THE LAW OF ONE PRICE

C. Five Parity Conditions Result From These 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)

*

ARBITRAGE AND THE LAW OF ONE PRICE

D. Five Parity Conditions Linked by

1. The adjustment of various

rates and prices to inflation.

*

ARBITRAGE AND THE LAW OF ONE PRICE

2. The notion that money should have no effect on real variables (since they have been adjusted for price changes).

*

ARBITRAGE AND THE LAW OF ONE PRICE

E. Inflation and home currency depreciation:

1. jointly determined by the growth of domestic money supply;

2. Relative to the growth of

domestic money demand.

*

ARBITRAGE AND THE LAW OF ONE PRICE

F. THE LAW OF ONE PRICE

- enforced by international

arbitrage.

*

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.

*

PURCHASING POWER PARITY

II. ABSOLUTE PURCHASING

POWER PARITY

A. Price levels adjusted for

exchange rates should be

equal between countries

*

PURCHASING POWER PARITY

II. ABSOLUTE PURCHASING

POWER PARITY

B. One unit of currency has same purchasing power globally.

*

PURCHASING POWER PARITY

III. 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.

*

PURCHASING POWER PARITY

1. In mathematical terms:

where et = future spot rate

e0 = spot rate

ih = home inflation

if = foreign inflation

t = the time period

*

PURCHASING POWER PARITY

2. If purchasing power parity is

expected to hold, then the best

prediction for the one-period

spot rate should be

*

PURCHASING POWER PARITY

3. A more simplified but less precise relationship is

that is, the percentage change should be approximately equal to the inflation rate differential.

*

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.

*

PURCHASING POWER PARITY

B. Real Exchange Rates:

the quoted or nominal rate adjusted for a country’s inflation rate is

*

PURCHASING POWER PARITY

C. Real exchange rates

1. If exchange rates adjust to inflation differential, PPP states that real exchange rates stay the same.

*

PURCHASING POWER PARITY

C. Real exchange rates

2. Competitive positions:

domestic and foreign firms

are unaffected.

*

PART III.
THE FISHER EFFECT (FE)

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

*

THE FISHER EFFECT

B. Real Rates of Interest

1. Should tend toward equality

everywhere through arbitrage.

2. With no government interference nominal rates vary by inflation differential or

rh - rf = ih - if

*

THE FISHER EFFECT

C. According to the Fisher Effect,

countries with higher inflation rates have higher interest rates.

*

THE FISHER EFFECT

D. Due to capital market integration globally, interest rate differentials are eroding.

*

PART IV. THE INTERNATIONAL
FISHER EFFECT (IFE)

I. IFE STATES:

A. the spot rate adjusts to the interest rate differential between two countries.

*

THE INTERNATIONAL FISHER EFFECT

IFE = PPP + FE

*

THE INTERNATIONAL FISHER EFFECT

B. Fisher postulated

1. The nominal interest rate differential should reflect the inflation rate differential.

*

THE INTERNATIONAL FISHER EFFECT

B. Fisher postulated

2. Expected rates of return are equal in the absence of government intervention.

*

THE INTERNATIONAL FISHER EFFECT

C. Simplified IFE equation:

(if rf is relatively small)

*

THE INTERNATIONAL FISHER EFFECT

D. Implications of IFE

1. Currency with the lower interest rate expected to appreciate relative to one

with a higher rate.

*

THE INTERNATIONAL FISHER EFFECT

D. Implications of IFE

2. Financial market arbitrage:

insures interest rate differential is an unbiased predictor of change in future spot rate.

*

PART VI. 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 (rh - rf) between two countries.

*

INTEREST RATE PARITY THEORY

2. The forward premium or

discount equals the interest

rate differential.

(F - S)/S = (rh - rf)

where rh = the home rate

rf = the foreign rate

*

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 + rh) = F

(1 + rf) S

*

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.

*

INTEREST RATE PARITY THEORY

3. Market pressures develop:

a. As one currency is more demanded spot and sold forward.

b. Inflow of fund depresses interest rates.

c. Parity eventually reached.

*

INTEREST RATE PARITY THEORY

C. Summary:

Interest Rate Parity states:

1. Higher interest rates on a

currency offset by forward discounts.

2. Lower interest rates are offset by forward premiums.

*

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

ft = et

*

PART VI. CURRENCYFORECASTING

I. FORECASTING MODELS

A. Created to forecast exchange rates in addition to parity conditions.

B. Two types of forecast:

1. Market-based

2. Model-based

*

CURRENCY FORECASTING

MARKET-BASED FORECASTS:

derived from market indicators.

A. The current forward rate contains implicit information about exchange rate changes for one year.

B. Interest rate differentials may be used to predict exchange rates beyond one year.

*

CURRENCY FORECASTING

MODEL-BASED FORECASTS:

include fundamental and technical analysis.

A. Fundamental relies on key macroeconomic variables and policies which most like affect exchange rates.

B. Technical relies on use of

1. Historical volume and price data

2. Charting and trend analysis

(

)

(

)

t

f

t

h

t

i

i

e

e

+

+

=

1

1

0

(

)

(

)

t

f

t

h

t

i

i

e

e

+

+

=

1

1

0

f

h

t

i

i

e

e

-

=

0

t

h

t

f

t

t

i

i

e

e

)

1

(

)

1

(

'

+

+

=

t

f

t

h

t

r

r

e

e

)

1

(

)

1

(

0

+

+

=

10

0

hf

ee

rr

e

-

-=

Homework is Completed By:

Writer Writer Name Amount Client Comments & Rating
Instant Homework Helper

ONLINE

Instant Homework Helper

$36

She helped me in last minute in a very reasonable price. She is a lifesaver, I got A+ grade in my homework, I will surely hire her again for my next assignments, Thumbs Up!

Order & Get This Solution Within 3 Hours in $25/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 3 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 6 Hours in $20/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 6 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 12 Hours in $15/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 12 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

6 writers have sent their proposals to do this homework:

Smart Tutor
Pro Writer
Top Quality Assignments
George M.
Professional Coursework Help
Assignment Guru
Writer Writer Name Offer Chat
Smart Tutor

ONLINE

Smart Tutor

As per my knowledge I can assist you in writing a perfect Planning, Marketing Research, Business Pitches, Business Proposals, Business Feasibility Reports and Content within your given deadline and budget.

$34 Chat With Writer
Pro Writer

ONLINE

Pro Writer

I can assist you in plagiarism free writing as I have already done several related projects of writing. I have a master qualification with 5 years’ experience in; Essay Writing, Case Study Writing, Report Writing.

$39 Chat With Writer
Top Quality Assignments

ONLINE

Top Quality Assignments

I will be delighted to work on your project. As an experienced writer, I can provide you top quality, well researched, concise and error-free work within your provided deadline at very reasonable prices.

$18 Chat With Writer
George M.

ONLINE

George M.

As an experienced writer, I have extensive experience in business writing, report writing, business profile writing, writing business reports and business plans for my clients.

$47 Chat With Writer
Professional Coursework Help

ONLINE

Professional Coursework Help

As an experienced writer, I have extensive experience in business writing, report writing, business profile writing, writing business reports and business plans for my clients.

$30 Chat With Writer
Assignment Guru

ONLINE

Assignment Guru

I am a PhD writer with 10 years of experience. I will be delivering high-quality, plagiarism-free work to you in the minimum amount of time. Waiting for your message.

$50 Chat With Writer

Let our expert academic writers to help you in achieving a+ grades in your homework, assignment, quiz or exam.

Similar Homework Questions

Pmdg 747 fuel planner - Computer gateway device crossword clue - 191 ballarat road maidstone - A business cycle reflects changes in economic activity - 100 pair cable colour code - Essential business concepts - Intercultural Competence Worksheet - D light design marketing channel strategies in india - The hairy ape summary in hindi - FINAL PAPER HUMAN RESOURCE MANAGEMENT - DUE IN 30 HOURS - Daphnia heart rate temperature lab report - S4 - 3 heavenly bodies that were discovered using radio waves - Commercial idps systems comparison spreadsheet - Was george justified in killing lennie why or why not - Uphill christina rossetti meaning - Binocular esterman visual field - Outline for negotiation - Set of Instructions for a Website - Stance essay - Turnaround at the preston plant - Mr laing orthopaedic surgeon - Understanding human communication 13th edition rent - Prove that angles opposite to equal sides are equal - Request for Reconsideration - The usual starting point for a master budget is - Where is the microsoft office button - Hereford hospital orthopaedic surgeons - Retirement Planning & Investment Planning - Discussion Question - Bangladesh police aig list - John foster hall reception - Guide to network cabling fundamentals pdf - Fink truss example problems - Gas turbine compressor surge - In a private closed economy when aggregate expenditures equal gdp - Rashomon and other stories pdf - Mater et magistra audience - Analytical Essay - Fellow craft square and compass - Pig happiness lynne mcfall - The ones who walk away from omelas analysis sparknotes - Answer questions - Baby you re a firework song - Excessive glycogen granules in liver - Shared Decision Making - Reply paid 2924 brisbane qld 4001 - Pliny the younger pompeii - Summer and summer prize bond list 750 - Uber and the sharing economy case study solution - Vicroads road design note - Booster power supply panel - API TEST STRIP ASSIGNMENT - Hypothetical business scenario - Harcourt education ltd 2004 catalyst 3 - Silver nitrate flame test color - Heat of neutralization lab report - Management class motivation theories - Six different images of managing change - Ul and ulc standards - Literacy pre assessment quiz gcu - Wk 1, IOP 490: Program Evaluation and Reflection - Linear kinematics lab report - Social Media - Solar system in thermocol sheet - Bahrain garden of eden - Lcm music theatre syllabus - Nur634d5q1 - How many m&ms are in a 10.70 oz bag - Hay group total reward framework - Finding the new technique and proposal - IoT solutions for well-being and active aging (Independent Elderly) using Data Mining Techniques - Accounting - Ucla physics and astronomy - Quantitative Evaluation 8381 - Should to kill a mockingbird be banned essay - Describe data collection lesson 12.2 - Proprietary estoppel by encouragement - Discussion Question - Smart board 6065 manual - Lab equipment matching worksheet - Words with the suffix ful - Primary objective of financial reporting - Should tablets replace textbooks - BE- Case Study 4 - Prevention Program Power point - Impractical jokers present your crotch - Random number generator mips - Anne heath widmark photo - Example of family genogram with explanation - Freak the mighty chapter 16 20 - Triangular arbitrage with bid ask quotes - Walmart inc takes on amazon com case study solution - Tense present by david foster wallace - Discussion - Bankstown girl high school ranking - Balancing redox reactions using half reaction method - Population and sample quiz - The seafarer poem by burton raffel - Air hole open bunsen burner - Sam powerpoint