international finance, ss 03 course summary and figures, part 3 · 2017-04-24 · prof. volker...

Prof. Volker Wieland: International Finance IF Skript 3 / 1

International Finance, SS 03International Finance, SS 03Course Summary and Figures, part 3Course Summary and Figures, part 3

Prof. Volker Wieland

Goethe University Frankfurt


3. Basic Tools3. Basic Tools for Understandingfor UnderstandingExchange RateExchange Rate

3.1. Arbitrage and Interest Rate Parity Conditions

3.2. Demand and Supply: Balance of Payments

3.3. Purchasing Power Parity


3.1. Arbitrage and3.1. Arbitrage and InterestInterest RateRate ParityParity

• Covered interest rate parity: Definition andillustration

• Covered interest arbitrage: Principle andexample

• Interest rate parity and equilibrium

• Forward rate as unbiased predictor of future spotrate

• Uncovered interest rate parity


Yield Curves and Forward PremiumYield Curves and Forward Premium

•


Covered Interest Rate Parity: IllustrationCovered Interest Rate Parity: Illustration


Covered InterestCovered Interest Arbitrage:Arbitrage: ExampleExample

•


Interest Rate Parity and EquilibriumInterest Rate Parity and Equilibrium


Deviations from Covered InterestDeviations from Covered InterestRateRate ParityParity


Forward Rate as Unbiased Predictor of Forward Rate as Unbiased Predictor of Future Spot RateFuture Spot Rate


Levich TextbookLevich Textbook TestsTests


Jung / Wieland, Jung / Wieland, Weltwirtschaftliches Archiv 1990Weltwirtschaftliches Archiv 1990


Empirical EvidenceEmpirical Evidence


3.2.3.2. TheThe Balance ofBalance of PaymentsPayments

• What determines the exchange rate?Demand and supply in the foreign exchange market

• The balance of payments is a statistical record that summarizes the economic transactions of aneconomy with ROW

Imports, exports of goods and services, income flows,capital flows, transfers, FX reserve balances

• The different forces influencing exchange ratesall induce transactions showing up in the BOP


Generic Balance of PaymentsGeneric Balance of Payments


Thailand‘s BOP: 84Thailand‘s BOP: 84--9191






3.3. Prices and Exchange Rates3.3. Prices and Exchange Rates

• The law of one price or commodity price parity

• Absolute purchasing power parity

• Relative purchasing power parity

• Empirical evidence

• The real exchange rate

• Effective exchange rates

• Exchange rate pass-through


TheThe Hamburger Standard 01/00Hamburger Standard 01/00


TheThe Hamburger Standard 01/03Hamburger Standard 01/03


TheThe Economist Standard (Economist Standard (LevichLevich 2000)2000)


Purchasing Power Parity LinePurchasing Power Parity Line


EmpiricalEmpirical Test: DeTest: De GrauweGrauwe (2000)(2000)

• Data: average yearly rates of inflation for 1970-99 and of change in exchange rate, 100 countries, Xrate vs $

• Regression equation: 2 CPIe C c π ε∆ = + +


IMF Nominal and RealIMF Nominal and Real EffectiveEffectiveExchange Rate IndicesExchange Rate Indices

international finance, ss 03 course summary and figures, part 3 · 2017-04-24 · prof. volker...

Documents