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Ch006 International Parity Relationships and

国际贸易,复习资料

Eun & Resnick 4e

6 International Parity Relationships and
Foreign Exchange Rates

Rate Parity
Interest Arbitrage
Rate Parity and Exchange Rate Determination
for Deviations from Interest Rate Parity
Power Parity
Deviations and the Real Exchange Rate
Finance in Practice: Big MacCurrencies
on Purchasing Power Parity
Effects
Exchange Rates
Market Approach
Approach
Approach
of the Forecasters

CASE: Turkish Lira and Purchasing Power Parity

6A: Purchasing Power Parity and Exchange Rate Determination

An arbitrage is best defined as:

) A legal condition imposed by the CFTC.
) The act of simultaneously buying and selling the
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sahttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762me or equivalent assets
or
for the purpose of making reasonable profits.
) The act of simultaneously buying and selling the same or equivalent assets or
for the purpose of making guaranteed profits.
) None of the above
: c)

Rate Parity

Interest Rate Parity (IRP) is best defined as:

) When a government brings its domestic interest rate in line with other major
financial

) When the central bank of a country brings its domestic interest rate in line
with its major
partners
) An arbitrage condition that must hold when international financial markets are
in

) None of the above

: c)

When Interest Rate Parity (IRP) does not hold

) there is usually a high degree of inflation in at least one country
) the fhttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762inancial markets
are in equilibrium
) there are opportunities for covered interest arbitrage
) b and c
: c)

A formal statement of IRP is

) F($/€)
($/€) 1 i$

€
) F($/€)1 i€
($/€) 1 i $
) F($/€) S($/€)
($/€) 1 i$

i
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€
) F($/€) S($/€) i$ i€
: a) Rationale: Equation 6.1: F($/€)1 i$
($/€) 1 i

Interest Arbitrage

Suppose that the one-year interest rate is 5.0 percent in the United States, the
spot
rate is $1.20/€, and the one-year forward exchange rate is $1.16/€. What must
one-year interest rate be in the euro zone?
) 5.0%
) 1.09%
) 8.62%
) None of the above.
: c) Rationale: equation 6.1:
($/€) i$$1.16/€
($/€) 1

€$1.20/€ 1.051 i 1 i€ 1.0862 €

://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762par

Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot
exchange rate is

$1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year
interest rate be in the United States?
) 1.2833%
) 1.0128%
) 4.75%
) None of the above.
: a) Rationale: equation 6.1:
($/€) i$$1.18/€ i$
($/€) 1

€$1.20/€ 11.03 1 i$ 1.0128

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A currency dealer has good credit and can borrow either $1,000,000 or €800,000
for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro
zone the one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 =
€1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how to
realize a certain profit via covered interest arbitrage.
) Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i€ = 6%;
://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 proceeds back at forward
rate of $1.20 = €1.00, gross proceeds = $1,017,600.
) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the
U.S. at i$ =

% for one year; translate €848,000 back into euro at the forward rate of $1.20
= €1.00. Net profit $2,400.
) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the
U.S. at i$ =

% for one year; translate €850,000 back into euro at the forward rate of $1.20
= €1.00. Net profit €2,000.
) Answers c) and b) are both correct
: d) Rationale: b) is true:
proceeds in dollars = €800,000 $1.25

€1.00 (1.02) $1,020,000

in euro = €848,000 €800,000 (1.06)
in dollars =€848,000 $1.20 €1.00 $1,017,600
profit in dollars = $1,020,000 $1,017,600 $2,400
) is also true:

€800,000 $1.25

€1.00 (1.02) €1.00

$1.20 €850,000

€850,0http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d6076200 €800,000
(1.06) €2,000
’s nothing in the problem to suggest that profits have to be in a particular
currency.

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest
for six months. You are considering the purchase of U.S. T-bills that yield
1.810% (that’s a six month rate, not an annual rate by the way) and have a
maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six
month forward rate is $1.00 = ¥110. The interest rate in Japan (on an
investment of comparable risk) is 13 percent. What is your strategy?
) take $1m, invest in U.S. T-bills
) take $1m, translate into yen at the spot, invest in Japan, repatriate your yen
earnings
into dollars at the spot rate prevailing in six months.
) take $1m, translate into yen at the spot, invest in Japan, hedge with a short
position in
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forward contract
) take $1m, thttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762ranslate
into yen at the forward rate, invest in Japan, hedge with a short
in the spot contract
: c)

A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one
year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the
one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00
and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a
certain dollar profit via covered interest arbitrage.
) Borrow $1,000,000 at 2%. Trade $1,000,000 for €800,000; invest at i€ = 6%;
proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the
U.S. at i$ =

% for one year; translate €848,000 back into euro at the forward rate of $1.20
= €1.00. Net profit $2,400.
) Borrow €800,000 at i€ =
http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d607626%; translate to dollars
at the spot, invest in the U.S. at i$ =

% for one year; translate €850,000 back into euro at the forward rate of $1.20
= €1.00. Net profit €2,000.
) Answers c) and b) are both correct
: b) Gross proceeds in dollars = €800,000 $1.25

€1.00 (1.02) $1,020,000

: cost in euro = €848,000 €800,000 (1.06)
in dollars =€848,000 $1.20

€1.00 $1,017,600
profit in dollars = $1,020,000 $1,017,600 $2,400

An Italian currency dealer has good credit and can borrow €800,000 for one
year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the
one-year interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00
and the one-year forward exchange rate is $1.20 = €1.00. Show how to realize a
certain euro-denominated profit via covered interest arbitrage.
) Borrow $1,000,000 at 2%. Trade
$1,000,000http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 for €800,000;
invest at i€ = 6%;
proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the
U.S. at i$ =

% for one year; translate €848,000 back into euro at the forward rate of $1.20
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= €1.00. Net profit $2,400.
) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the
U.S. at i$ =

% for one year; translate €850,000 back into euro at the forward rate of $1.20
= €1.00. Net profit €2,000.
) Answers c) and b) are both correct
: c)
:

$1.25€1.00€800,000 €1.00 (1.02) $1.20 €850,000

€850,000 €800,000 (1.06) €2,000

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest
for six months. You are considering the purchase of U.S. T-bills that yield
1.810% (that’s a six month rate, not
anhttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 annual rate by the
way) and have a maturity of 26 weeks. The spot
rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110.
What must the interest rate in Japan (on an investment of comparable risk) be
before you are willing to consider investing there for six months?
) 11.991%
) 1.12%
) 7.45%
) –7.45%
: a)
: The no-arbitrage condition is

$1,000,000 × (1.0181) = $1,000,000 × ¥1001.00

$1.00 × (1 i¥ ) × $

¥110

.0181 = ¥100

$1.00 × (1 i¥ ) × $1.00

¥110

¥110$1.00

¥ = 1.0181 × $1.00 × ¥100 –1

¥ = 11.991%
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Covered Interest Arbitrage (CIA) activities will result in

) an unstable international financial markets
) restoring equilibriuhttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762m
quite quickly
) a disintermediation
) no effect on the market
: b).

Suppose that the one-year interest rate is 5.0 percent in the United States and
3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-
year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow
up to $1,000,000.
) This is an example where interest rate parity holds.
) This is an example of an arbitrage opportunity; interest rate parity does NOT
hold. c) This is an example of a Purchasing Power Parity violation and an
arbitrage opportunity. d) None of the above.

: b) Rationale: equation 6.1: F($/€) i$

($/€) 1

Suppose that the annual interest rate is 5.0 percent in the United States and
3.5 percent in
, and that the spot exchange rate is $1.12/€ and the forward exchange rate,
wihttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762th one-year maturity,
is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute
trader finds an arbitrage, what is the net cash flow in one year?
) $10,690
) $15,000
) $46,207
) $21,964.29
: d)
: $21,964.29 = –$1,000,000 × (1.05) $1,000,000 × €1.00

$1.12 × (1.035) × $1.16€1.00

Rate Parity and Exchange Rate Determination

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Suppose that the one-year interest rate is 5.0 percent in the United States and
3.5 percent
Germany, and the one-year forward exchange rate is $1.16/€. What must the spot
exchange rate be?
) $1.1768/€
) $1.1434/€.
) $1.12/€
) None of the above.
: b) Rationale: equation 6.1:
($/€)i$$1.16/€
($/€) 1

€S($/€) 1.051.035 S($/€) $1.1434/€

A higher U.S. interest

http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762rate (i$ ↑) will result
in
) a stronger dollar
) a lower spot exchange rate (expressed as foreign currency per U.S. dollar)
) both a) and b)
) None of the above
: a)
: all else equal, a higher U.S. interest rate will attract capital to the U.S.,
increasing demand for dollars, which leads to a stronger dollar (and a lower
spot rate when the sport rate is quoted as the number of U.S. dollars per unit
of foreign currency).

If the interest rate in the U.S. is i$ = 5 percent for the next year and
interest rate in the U.K.
i£ = 8 percent for the next year, uncovered IRP suggests that
) The pound is expected to depreciate against the dollar by about 3 percent.
) The pound is expected to appreciate against the dollar by about 3 percent.
) The dollar is expected to appreciate against the pound by about 3 percent.
) http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762a) and c) are both true
: d)

A currency dealer has good credit and can borrow either $1,000,000 or €800,000
for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro
zone the one-year interest rate is i€ = 6%. The one-year forward exchange rate
is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage
opportunities?
) $1.2471 = €1.00
) $1.20 = €1.00
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) $1.1547 = €1.00
) none of the above
: Rationale: S($/€) F($/€) (1 i$1.20

€) 1.06

$1.02

for Deviations from Interest Rate Parity

[此处图片未下载成功]

[此处图片未下载成功]

a) Yes, borrow $1,000 at 5%; Trade for € at the ask spot rate $1.01 = €1.00;
Invest €990.10
5.5%; Hedge this with a forward contract on €1,044.55 at $0.99 = €1.00;
Receive $1.034.11
) Yes, borrow €1,000 at 6%; Trade for $ at
thehttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 bid spot rate $1.00 =
€1.00; Invest $1,000 at

.5%; Hedge this with a forward contract on €1,045 at $1.00 = €1.00.

) No; the transactions costs are too high
) None of the above
: c)

If IRP fails to hold

) Pressure from arbitrageurs should bring exchange rates and interest rates back
into line b) It may fail to hold due to transactions costs
) It may be due to government-imposed capital controls
) All of the above
d)

Although IRP tends to hold, it may not hold precisely all the time
) Due to transactions costs, like the bid ask spread
) Due to asymmetric information
) Due to capital controls imposed by governments
) a) and c)
: d)
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Power Parity

If a foreign county experiences a hyperinflation

) Its currency will depreciate against
sthttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762able currencies
) Its currency may appreciate against stable currencies
) Its currency may be unaffected—it’s difficult to say.
) None of the above
: a)

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation
expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone.
What is the one-year forward rate that should prevail?
) €1.00 = $1.2379
) €1.00 = $1.2623
) €1.00 = $0.9903
) $1.00 = €1.2623
: a) Rationale: Take the spot rate and gross up each side by the respective
inflation rates €1.00 1.03 $1.25 1.02

€1.00 $1.25 1.02

.03 $1.2379

Purchasing Power Parity (PPP) theory states that:

) The exchange rate between currencies of two countries should be equal to the
ratio of the
’ price levels.
) As the purchasing power of a
currehttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762ncy sharply declines
(due to hyperinflation) that
will depreciate against stable currencies.
) The prices of standard commodity baskets in two countries are not related.
) a) and b)
: d)

Deviations and the Real Exchange Rate

If the annual inflation rate is 5.5 percent in the United States and 4 percent
in the U.K., and the dollar depreciated against the pound by 3 percent, then the
real exchange rate, assuming that PPP initially held, is:
) 0.07
) 0.98
) –0.0198
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) 4.5
: b) Rationale: Equation 6.14:
1 $

(1 e)(1 1.05

£)1.03 1.04 0.9802

on Purchasing Power Parity

In view of the fact that PPP is the manifestation of the law of one price
applied to a standard commodity basket,
) It will hold only if the prices of the constituent
commodithttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762ies are equalized
across
in a given currency
) It will hold only if the composition of the consumption basket is the same
across
.
) Both a) and b)
) None of the above
: c)

Some commodities never enter into international trade. Examples include:

) Nontradables
) Haircuts
) Housing
) All of the above
: d)

Generally unfavorable evidence on PPP suggests that

) Substantial barriers to international commodity arbitrage exist
) Tariffs and quotas imposed on international trade can explain at least some of
the

) Shipping costs can make it difficult to directly compare commodity prices

) All of the above
: d)

The price of a McDonald’s Big Mac sandwich

) Is about the same in the 120 countries that
McDonahttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762lds does business
in
) Varies considerably across the world in dollar terms
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) Supports PPP
) None of the above
: b)
: One explanation is that a big mac will cost more in Hawaii than Iowa because
you first have to buy the cow an airplane ticket.

Effects

The Fisher effect can be written for the United States as:
) i$ = $ E( $) $ × E( $)
) $ = i$ E( $) i$ × E( $)
) q 1 $

(1 e)(1 £)
) F($/€)
($/€) 1 i$

i €
: a)

Forward parity states that

) Any forward premium or discount is equal to the expected change in the
exchange rate. b) Any forward premium or discount is equal to the actual change
in the exchange rate c) The nominal interest rate differential reflects the
expected change in the exchange rate. d) An increase (decrease)
inhttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 the expected inflation
rate in a country will cause a
increase (decrease) in the interest rate in the country.
: a)

The International Fisher Effect suggests that

) Any forward premium or discount is equal to the expected change in the
exchange rate. b) Any forward premium or discount is equal to the actual change
in the exchange rate c) The nominal interest rate differential reflects the
expected change in the exchange rate. d) An increase (decrease) in the expected
inflation rate in a country will cause a
increase (decrease) in the interest rate in the country.
: c)

The Fisher effect states that:

) Any forward premium or discount is equal to the expected change in the
exchange rate. b) Any forward premium or discount is equal to the actual change
in the exchange rate c) The nominal interest rate
differentiahttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762l reflects the
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expected change in the exchange rate. d) An increase (decrease) in the expected
inflation rate in a country will cause a
increase (decrease) in the interest rate in the country.
: d)

Exchange Rates

If you could accurately and consistently forecast exchange rates

) This would be a very handy thing.
) You could impress your dates.
) You could make a great deal of money.
) All of the above
: d)
: What date wouldn’t be impressed with ―Hey baby, in three months the euro
will appreciate by 5 percent against the dollar.‖?

35 The main approaches to forecasting exchange rates are:

) Efficient market, Fundamental, and Technical approaches
) Efficient market and Technical approaches
) Efficient market and Fundamental approaches
) Fundamenhttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762tal and
Technical approaches
: a)

The benefit to forecasting exchange rates:

) Are greatest during periods of fixed exchange rates
) Are nonexistent now that the euro and dollar are the biggest game in town
) Accrue to and are a vital concern for MNCs formulating international sourcing,
, financing and marketing strategies.
) All of the above.
: c)

Market Approach

The Efficient Markets Hypothesis states

) Markets tend to evolve to low transactions costs and speedy execution of
orders.
) Current asset prices (e.g. exchange rates) fully reflect all the available and
relevant
.
) Current exchange rates cannot be explained by such fundamental forces as money
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, inflation rates and so forth.
) None of the above
: b)

http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762

Good, inexpensive, and fairly reliable predictors of future exchange rates

include: a) Today’s exchange rate.
) Current forward exchange rates (e.g. the six-month forward rate is a pretty
good
of the spot rate that will prevail six months from today).
) Esoteric fundamental models that take an econometrician to use and no one can
explain. d) Both a) and b)
: d)

If the exchange rate follows a random walk

) The future exchange rate is unpredictable
) The future exchange rate is expected to be the same as the current exchange
rate, St =
(St 1)
) The best predictor of future exchange rates is the forward rate Ft = E(St 1|
It). d) b) and c)
: b)
: c) is wrong because the forward rate model is distinct from the random walk
model

45 The moving average crossover rule a) Is a fundamental approach

thttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762o forecasting exchange
rates. b) States that a crossover of the short-term moving average above the
long-term moving average signals that the foreign currency is appreciating. c)
States that a crossover of the short-term moving average above the long-term
moving average signals that the foreign currency is depreciating. d) None of the
above Answer: b) 46 According to the technical approach, what matters in
exchange rate determination a) The past behavior of exchange rates b) The
velocity of money c) The future behavior of exchange rates d) The betaAnswer: a)
of the Forecasters 47 Studies of the accuracy of paid exchange rate forecasters
a) Tend to support the view that ―you get what you pay for‖. b) Tend to
support the view that forecasting is easy, at least with regard to major
currencies like the euro and Japanese yen. c) Tend to support the view that
banks do their best forecasting with the yen d) None of
thehttp://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 above Answer: d) 48
According to the research in the accuracy of paid exchange rate forecasters a)
As a group, they do not do a better job of forecasting the exchange rate than
the forwardrate does.
) The average forecaster is better than average at forecasting c) The
forecasters do a better job of predicting the future exchange rate than the
marketdoes. d) None of the above. Answer: a)
/Resnick 4e
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Appendix 6A: Purchasing Power Parity and Exchange Rate Determination 49

According to the monetary approach, what matters in the exchange rate
determination area) The relative money supplies b) The relative velocities of
monies c) The relative national outputs d) All of the above Answer: d)

According to the monetary approach, the exchange rate can be expressed as M

V y a) S $ $ £ M # V y$ b) P$
$V$ y$

M V y http://www.wendangwang.com/doc/b87e4e90c5ea70e8f2d60762 c) S
$ $ $ M # V y d) None of the aboveAnswer: a) Rationale:
equation 6A.2:

M V S $ $ M # V

y£ y$
/Resnick 4e

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