國際評價條件

1、CHAPTER 6: International Parity ConditionsMaker：楊雨學， 席易辰目 錄CONTENTS2345Prices and Exchange RatesInterest and Exchange RatesPurchasing Power Parity and the Law of One PricePrices, Interest Rates, and Exchange Rates in Equilibrium1Forward Rate as an Unbiased Predictor of the Future Spot RatePART1Price

2、s and Exchange RatesPrices and Exchange Rates If identical products or services can be sold in two different markets, and no restrictions exist on the sale or transportation costs of moving the product between markets, the products price should be the same in both markets. This is called the law of

3、one price.A primary principle of competitive markets is that prices will equalize across markets if frictions or costs of moving the products or services between markets do not exist. If the two markets are in two different currency terms, but the price of the product should still be the same. Compa

4、ring prices would require only a conversion from one currency to the other. For example, PART2Purchasing Power Parity and the Law of One PricePurchasing Power Parity and the Law of One Price If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate

5、 could be found from any individual set of prices. By comparing the prices of identical products denominated in different currencies, one could determine the “real” or PPP exchange rate that should exist if markets were efficient. This is the absolute version of the theory of purchasing power parity

6、. Absolute PPP states that the spot exchange rate is determined by the relative prices of similar baskets of goods.Purchasing Power Parity and the Law of One PriceRelative Purchasing Power ParityIf the assumptions of the absolute version of PPP theory are relaxed a bit more, we observe what is terme

7、d relative purchasing power parity. Relative PPP holds that PPP is not particularly helpful in determining what the spot rate is today, but that the relative change in prices between two countries over a period of time determines the change in the exchange rate over that period. More specially, if t

8、he spot exchange rate between two countries starts in equilibrium, any change in the differential rate of inflation between them tends to be offset over the long run by an equal but opposite change in the spot exchange rate.Purchasing Power Parity and the Law of One PriceEmpirical Tests of Purchasin

9、g Power ParityExtensive testing of both the absolute and relative versions of purchasing power parity and the law of one price has been done. These tests have, for the most part, not proved PPP to be accurate in predicting future exchange rates. Goods and services are not “tradable”- for example, ha

10、ircuts. Many goods and services are not of the same quality across countries, reflecting differences in the tastes and resources of the countries of their manufacture and consumption.Purchasing Power Parity and the Law of One PriceExchange Rate Indices: Real and Nominal One of the primary methods of

11、 dealing with this problem is the calculation of exchange rate indices. These indices are formed by trade-weighing the bilateral exchange rates between the home country and its trading partners.Exchange Rate Pass-ThroughIncomplete exchange rate pass-through is one reason that a countrys real effecti

12、ve exchange rate index can deviate for lengthy period from its PPP-equilibrium level of 100. The degree to which the prices of imported and exported goods change as a result of exchange rate changes is term pass-through.PART3Interest and Exchange RatesInterest and Exchange Rates The Fisher Effect st

13、ates that nominal interest rates in each country reflect to the required real rate of return and compensation for expected inflation:where i is the nominal interest rate, r is the real interest rate, and p is the expected inflation rate This equation reduces to (in approximate form): Empirical tests

14、 (using ex-post) national inflation rates have shown the Fisher Effect usually exists for short-maturity government securities (Treasury bills and notes).)1)(1(1prip riInterest and Exchange Rates The Fisher Effect should hold in all countries and leads to the International Fisher Effect The Internat

15、ional Fisher Effect is the relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates (in different national capital markets) “Fisher-open”, as it is termed, states that the spot exchange rate should change in an equal amount

16、 but in the opposite direction to the difference in interest rates between two countries The International Fisher Effect links: The current spot rate, The (expected) future spot rate, and The interest rates in each countryInterest and Exchange Rates A forward rate is an exchange rate quoted for sett

17、lement at some future date. A forward exchange agreement between currencies states: The rate of exchange at which a foreign currency will be bought forward or sold forward The amount of currency to bought or sold The specific transaction date (in the future)Interest and Exchange Rates The theory of

18、Interest Rate Parity (IRP) provides the linkage between the foreign exchange markets and the money markets in different countries The difference in the national interest rates for securities of similar risk and maturity should move in the opposite direction relative to the forward rate premium for t

19、he foreign currency (except for transaction costs) IRP links: the current spot rate, the forward rate, and the interest rates in each country IRP differs from the International Fisher Effect, in that IRP relies on a pre-negotiated forward rate to reconvert currency at the future datenot an expected

20、future spot rateand avoids currency risk Unlike RPPP and the International Fisher Effect, IRP holds even if we relax the assumption of no uncertainty!Interest and Exchange Rates Interest Rate Parity (IRP) states that an investor should be indifferent between:1. Investing in her home market for some

21、period and 2. Converting to a foreign currency at the spot rate, investing in the foreign market, and entering into a forward contract to reconvert from the foreign currency back into her home currency Or, more concisely (but still exactly), interest rate parity is:where F is the forward rate (SF/$)

22、 Or, in approximate form, interest rate parity is:$/$/$1)1(1SFSFSFFiSi$iiSFSF11SFiiFFS$Interest and Exchange RatesInterest and Exchange Rates The spot and forward exchange rates are not, however, constantly in the state of equilibrium described by interest rate parity For fleeting moments, the marke

23、t is not in equilibrium, and the potential for (riskless) arbitrage profit exists The arbitrageur will exploit the imbalance by investing in whichever currency offers the higher return on a covered basis This is known as Covered Interest Arbitrage (CIA)Interest and Exchange RatesInterest and Exchang

24、e Rates A deviation from covered interest arbitrage is Uncovered Interest Arbitrage (UIA) Essentially, investors believe that there is a violation of the International Fisher Effect not IRP In practice, investors are betting that the future spot rate will not be much different from the current spot

25、ratedespite an interest rate differential In this case, investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceed into currencies that offer much higher interest rates The transaction is “uncovered” because the investor does not sell the higher yie

26、lding currency proceeds forward but plans to sell spot later on The investor chooses to remain uncovered and accept the currency risk of exchanging the higher yielding currency into the lower yielding currency at the end of the periodInterest and Exchange RatesPART4Forward Rate as an Unbiased Predic

27、tor of the Future Spot RateForward Rate as an Unbiased Predictor of the Future Spot RateSome forecasters believe that forward exchange rates are unbiased predictors of future spot exchange rates.Intuitively this means that the distribution of possible actual spot rates in the future is centered on t

28、he forward rate.Unbiased prediction simply means that the forward rate will, on average, overestimate and underestimate the actual future spot rate in equal frequency and degreeForward rates can be valuable in multinational capital budgeting decisionsForward Rate as an Unbiased Predictor of the Futu

29、re Spot RatePART5Prices, Interest Rates, and Exchange Rates in EquilibriumPrices, Interest Rates, and Exchange Rates in EquilibriumThe absolute theory of PPP applies the Law of One Price cross-country to baskets of goods and states that the spot rate is determined by the relative prices of the baske

30、ts in two countriesThe relative theory of PPP states that any differential in inflation rates should be offset over the long run by an opposite change in the spot rateThe Fisher Effect states that nominal interest rates equal the required real rate of return plus expected inflation The International Fisher Effect states that the percent