Multinational Financial Management（跨国公司财务管理）ch04 International Finance and Currency Parity Conditions.ppt

1,CHAPTER4,InternationalFinanceandCurrency:ParityConditions,PARTI.ARBITRAGEANDTHELAWOFONEPRICE,I.THELAWOFONEPRICEA.Lawstates:Identicalgoodssellforthesamepriceworldwide.,ARBITRAGEANDTHELAWOFONEPRICE,B.Theoreticalbasis:Ifthepricesafterexchange-rateadjustmentwerenotequal,arbitrageinthegoodsworldwideensureseventuallyitwill.,ARBITRAGEANDTHELAWOFONEPRICE,C.FiveParityConditionsResultFromTheseArbitrageActivities1.PurchasingPowerParity(PPP)2.TheFisherEffect(FE)3.TheInternationalFisherEffect(IFE)4.InterestRateParity(IRP)5.UnbiasedForwardRate(UFR),ARBITRAGEANDTHELAWOFONEPRICE,D.FiveParityConditionsLinkedby1.Theadjustmentofvariousratesandpricestoinflation.2.Thenotionthatmoneyshouldhavenoeffectonrealvariables(sincetheyhavebeenadjustedforpricechanges).,ARBITRAGEANDTHELAWOFONEPRICE,E.Inflationandhomecurrencydepreciation:1.jointlydeterminedbythegrowthofdomesticmoneysupply;2.Relativetothegrowthofdomesticmoneydemand.,ARBITRAGEANDTHELAWOFONEPRICE,F.THELAWOFONEPRICE-enforcedbyinternationalarbitrage.,PARTII.PURCHASINGPOWERPARITY,I.THETHEORYOFPURCHASINGPOWERPARITY:statesthatspotexchangeratesbetweencurrencieswillchangetothedifferentialininflationratesbetweencountries.,PURCHASINGPOWERPARITY,II.ABSOLUTEPURCHASINGPOWERPARITYA.Pricelevelsadjustedforexchangeratesshouldbeequalbetweencountries,PURCHASINGPOWERPARITY,II.ABSOLUTEPURCHASINGPOWERPARITYB.Oneunitofcurrencyhassamepurchasingpowerglobally.,PURCHASINGPOWERPARITY,III.RELATIVEPURCHASINGPOWERPARITYA.statesthattheexchangerateofonecurrencyagainstanotherwilladjusttoreflectchangesinthepricelevelsofthetwocountries.,PURCHASINGPOWERPARITY,1.Inmathematicalterms:whereet=futurespotratee0=spotrateih=homeinflationif=foreigninflationt=thetimeperiod,PURCHASINGPOWERPARITY,2.Ifpurchasingpowerparityisexpectedtohold,thenthebestpredictionfortheone-periodspotrateshouldbe,PURCHASINGPOWERPARITY,3.Amoresimplifiedbutlesspreciserelationshipisthatis,thepercentagechangeshouldbeapproximatelyequaltotheinflationratedifferential.,PURCHASINGPOWERPARITY,4.PPPsaysthecurrencywiththehigherinflationrateisexpectedtodepreciaterelativetothecurrencywiththelowerrateofinflation.,PURCHASINGPOWERPARITY,B.RealExchangeRates:thequotedornominalrateadjustedforacountrysinflationrateis,PURCHASINGPOWERPARITY,C.Realexchangerates1.Ifexchangeratesadjusttoinflationdifferential,PPPstatesthatrealexchangeratesstaythesame.,PURCHASINGPOWERPARITY,C.Realexchangerates2.Competitivepositions:domesticandforeignfirmsareunaffected.,PARTIII.THEFISHEREFFECT(FE),I.THEFISHEREFFECTstatesthatnominalinterestrates(r)areafunctionoftherealinterestrate(a)andapremium(i)forinflationexpectations.R=a+i,THEFISHEREFFECT,B.RealRatesofInterest1.Shouldtendtowardequalityeverywherethrougharbitrage.2.Withnogovernmentinterferencenominalratesvarybyinflationdifferentialorrh-rf=ih-if,THEFISHEREFFECT,C.AccordingtotheFisherEffect,countrieswithhigherinflationrateshavehigherinterestrates.,THEFISHEREFFECT,D.Duetocapitalmarketintegrationglobally,interestratedifferentialsareeroding.,PARTIV.THEINTERNATIONALFISHEREFFECT(IFE),I.IFESTATES:A.thespotrateadjuststotheinterestratedifferentialbetweentwocountries.,THEINTERNATIONALFISHEREFFECT,IFE=PPP+FE,THEINTERNATIONALFISHEREFFECT,B.Fisherpostulated1.Thenominalinterestratedifferentialshouldreflecttheinflationratedifferential.,THEINTERNATIONALFISHEREFFECT,B.Fisheralsopostulatedthat2.Expectedratesofreturnareequalintheabsenceofgovernmentintervention.,THEINTERNATIONALFISHEREFFECT,C.SimplifiedIFEequation:(ifrfisrelativelysmall),THEINTERNATIONALFISHEREFFECT,D.ImplicationsofIFE1.Currencywiththelowerinterestrateisexpectedtoappreciaterelativetotheonewithahigherrate.,THEINTERNATIONALFISHEREFFECT,D.ImplicationsofIFE2.Financialmarketarbitrage:insuresinterestratedifferentialisanunbiasedpredictorofchangeinfuturespotrate.,PARTVI.INTERESTRATEPARITYTHEORY,I.INTRODUCTIONA.TheTheorystates:theforwardrate(F)differsfromthespotrate(S)atequilibriumbyanamountequaltotheinterestdifferential(rh-rf)betweentwocountries.,INTERESTRATEPARITYTHEORY,2.Theforwardpremiumordiscountequalstheinterestratedifferential.(F-S)/S=(rh-rf)whererh=thehomeraterf=theforeignrate,INTERESTRATEPARITYTHEORY,3.Inequilibrium,returnsoncurrencieswillbethesamei.e.Noprofitwillberealizedandinterestparityexistswhichcanbewritten,INTERESTRATEPARITYTHEORY,B.CoveredInterestArbitrage1.Conditionsrequired:interestratedifferentialdoesnotequaltheforwardpremiumordiscount.2.Fundswillmovetoacountrywithamoreattractiverate.,INTERESTRATEPARITYTHEORY,3.Marketpressuresdevelop:a.Asonecurrencyismoredemandedspotandsoldforward.b.Inflowoffunddepressesinterestrates.c.Parityeventuallyreached.,INTERESTRATEPARITYTHEORY,C.Summary:InterestRateParitystates:1.Higherinterestratesonacurrencyoffsetbyforwarddiscounts.2.Lowerinterestratesareoffsetbyforwardpremiums.,PARTVI.THERELATIONSHIPBETWEENTHEFORWARDANDTHEFUTURESPOTRATE,I.THEUNBIASEDFORWARDRATEA.Statesthatiftheforwardrateisunbiased,thenitshouldreflecttheexpectedfuturespotrate.B.Statedasft=et,PARTVI.CURRENCYFORECASTING,I.FORECASTINGMODELSA.Createdtoforecastexchangeratesinadditiontoparityconditions.B.Twotypesofforecast:1.Market-based2.Model-based,CURRENCYFORECASTING,MARKET-BASEDFORECASTS:derivedfrommarketindicators.A.Thecurrentforwardratecontainsimplicitinformationaboutexchangeratechangesforoneyear.B.Interestratedifferentialsmaybeusedtopredictexc