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

International finance multiple choice questions

22/10/2021 Client: muhammad11 Deadline: 2 Day

Multinational Financial Management

*

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:

Homework Master
Phd Writer
Academic Master
Chartered Accountant
Engineering Solutions
Top Class Engineers
Writer Writer Name Offer Chat
Homework Master

ONLINE

Homework Master

I am a professional and experienced writer and I have written research reports, proposals, essays, thesis and dissertations on a variety of topics.

$32 Chat With Writer
Phd Writer

ONLINE

Phd Writer

I am an elite class writer with more than 6 years of experience as an academic writer. I will provide you the 100 percent original and plagiarism-free content.

$30 Chat With Writer
Academic Master

ONLINE

Academic Master

I have written research reports, assignments, thesis, research proposals, and dissertations for different level students and on different subjects.

$32 Chat With Writer
Chartered Accountant

ONLINE

Chartered Accountant

I have written research reports, assignments, thesis, research proposals, and dissertations for different level students and on different subjects.

$44 Chat With Writer
Engineering Solutions

ONLINE

Engineering Solutions

I have assisted scholars, business persons, startups, entrepreneurs, marketers, managers etc in their, pitches, presentations, market research, business plans etc.

$20 Chat With Writer
Top Class Engineers

ONLINE

Top Class Engineers

This project is my strength and I can fulfill your requirements properly within your given deadline. I always give plagiarism-free work to my clients at very competitive prices.

$33 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

2 page apa paper on communication - Salvation army mission statement - Duggins veterinary supplies can issue - Project management google books - 150 words due tonight two hours - How to find halfway between two decimal numbers - Igolder pgp - Under armour vrio - Weep holes in brick cavity walls - Nithyananda books in tamil - Indentity vs role confusion - Range of a vector valued function - Comp10 - In what ways is tom buchanan a hypocrite - Medium textured plants nz - Acu extension request form - Literary Analysis of Sula - No frills money skills episode 2 ways to save answers - Substance Abuse Project - How to calculate expected payoff - Social learning - Land residual method formula - Ludlow medieval christmas festival - Order 2401974: Elasticity - World health organization newsletter - Yarra valley water gis - Palmbeachstate.edu blackboard - My zombie myself why modern life feels rather undead - Employers typically examine - Aston hall by candlelight - Flair flexible packaging jobs - A knight's tale introduction - Discussion - 4 3/5 as an improper fraction - Residency paper - Theory of Human Caring on APN Role Student Presentation - Journal 200 words - Cube root of 200 - Advanced Level Marketing. 6 page essay plus reference page. APA format 100% plagarism free. - How using edi facilitates electronic transactions - Examples of professional growth plans for speech-language pathologists - Create a poem - Parking near sydney university - The Genre of the Book of Acts as Theological History - Name the ionic compound na2s - How to apply for mcdonalds franchise - City and guilds functional skills 3748 - Knight company reports the following costs and expenses in may. - LIVE! LIVE! LIVE! I NEED SOMEONE TO ANSWER QUESTIONS (TIMED) MUSIC CLASS - Nitric acid + barium carbonate - Wk 1, IOP 490: DR 2 - Bryan rafanelli net worth - Sanatorium lake walking trail - Del lago partners v smith - Hosmer's analytical process model - Formal analysis example - RN Information Systems in Healthcare - Direct mail and catalogue retailing are examples of _____ - Tortilla curtain questions - Peoplesoft uct ac za - Big bang theory powerpoint - Lime crush soda for sale - Moving control volume fluid mechanics - How to make a beer's law plot in excel - The navajo origin legend - Evelyn duvall family development - Grab manufacturing co purchased a 10 ton draw press - Fundamentals of Criminals investigations - Height of empire state building meters - Me talk pretty one day essay analysis - How to create a dichotomous key for bacteria - Institutional Treatment of Criminal Offender – Chapter 8 - Chemical reactions that produce gas - Organic molecular modeling lab - Assignment 2 the gig economy - Simchart for medical office answer key - Management Finance - Construction training institute helensvale - The edible woman summary - Mcphatter funeral home in laurel hill nc - Alpha medical clinic cobram - Statistical symbols and definitions matching assignment - Percy jackson chapter 22 answers - Probability and statistical inference answers - Ucd admissions office number - Week 3 discussion law enforcement - Recruiting, Selection, and Training - Ferrari case study - Advance Pharmacology - Bob leach eliminator boats - Boston children's hospital measuring patient costs - The red fox fur coat analysis - Mettler toledo pipette calibration system - Solver paint colours chart - Job Analysis Research Presentation - Yo les envié sent postales a mis amigos - 3 Full pages - Badminton backhand serve rules - 170g liquid to ml - Hi technology lamington road