Ch006-International-Parity-Relationships-and復習進程

1、精品文檔Eun & Resnick 4eCHAPTER 6 International Parity Relationships andForecasting Foreign Exchange RatesInterest Rate ParityCovered Interest ArbitrageInterest Rate Parity and Exchange Rate DeterminationReasons for Deviations from Interest Rate ParityPurchasing Power ParityPPP Deviations and the Re

2、al Exchange RateInternational Finance in Practice: Big MacCurrenciesEvidence on Purchasing Power ParityFisher EffectsForecasting Exchange RatesEfficient Market ApproachFundamental ApproachTechnical ApproachPerformance of the ForecastersSummaryMINI CASE: Turkish Lira and Purchasing Power ParityAppend

3、ix 6A: Purchasing Power Parity and Exchange Rate Determination1 An arbitrage is best defined as:a) A legal condition imposed by the CFTC.b) The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.c) The act of simultaneou

4、sly buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.d) None of the aboveAnswer: c)Interest Rate Parity2 Interest Rate Parity (IRP) is best defined as:a) When a government brings its domestic interest rate in line with other major financial

5、 marketsb) When the central bank of a country brings its domestic interest rate in line with its major trading partnersc) An arbitrage condition that must hold when international financial markets are in equilibriumd) None of the aboveAnswer: c)3 When Interest Rate Parity (IRP) does not holda) there

6、 is usually a high degree of inflation in at least one countryb) the financial markets are in equilibriumc) there are opportunities for covered interest arbitraged) b and c精品文檔Answer: c)4 A formal statement of IRP isa)b)c)d)F($/?)1 i$S($/?) FTF($/?)1 i?s($/?) rn;F($/?) S($/?)S($/?)F($/?) S($/?)1 i$1

7、 i?i$ i?Answer: a)F($/?)1 i$Rationale: Equation 6.1: S($/?)1 i?Covered Interest Arbitrage5 Suppose that the one-year interest rate is 5.0 percent in the United States, the spot exchange rate is $1.20/?, and the or-eear forward exchange rate is $1.16/?. What must one-year interest rate be in the euro

8、 zone?a) 5.0%b) 1.09%c) 8.62%d) None of the above.Answer: c)Rationale: equation 6.1:F($/?)1i$1.16/?1.05 I i?1.0862S($/?)1i?$1.20/?1 i?6 Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/?, and the one/ear forward exchange rate is $1.18/?. What must

9、one year interest rate be in the United States?a) 1.2833%b) 1.0128%c) 4.75%d) None of the above.Answer: a)Rationale: equation 6.1:F($/?)1 i$S($/?)1 i?$1.18/?1 i$1.20/?1.031 i$ 1.01287 A currency dealer has good credit and can borrow either $1,000,000 or ?800,000 for one year. The one-year interest r

10、ate in the U.S. is = 2% and in the euro zone the one-year interest rate is? = 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.a) Borrow $1,000,000 at 2%. Trade $1,000,000 for ?800

11、,000; invest at i? = 6%; translate proceeds back at forward rate of $1.20 = ?1.00, gross proceeds = $1,017,600.b) Borrow ?800,000 at i? = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?848,000 back into euro at the forward rate of $1.20 = ?1.00. Net prof

12、it $2,400.c) Borrow ?800,000 at i? = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?850,000 back into euro at the forward rate of $1.20 = ?1.00. Net profit ?2,000.d) Answers c) and b) are both correctAnswer: d)Rationale: b) is true:Gross proceeds in doll

13、ars = ?800,000 115 (1.02) $1,020,000cost in euro = ?848,000 ?800,000 (1.06)cost in dollars =?848,000 $1四 $1,017,600 ?1.00net profit in dollars = $1,020,000 $1,017,600 $2,400c) is also true:-$1.25?1.00 -?800,000 一 (1.02)-?850,000?1.00$1.20?850,000 ?800,000 (1.06) ?2,000There ' s nothing in the pr

14、oblem to suggest that profits have to be in a particular currency.8 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 yieldl.810% (that ' s a six month rate, not an annual rate by the way) and have

15、 a maturity of 26 weeks. The spot exchange rate is $1.00 = 100, and¥he 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?a) take $1m, invest in U.S. T-billsb) take $1m, translate into yen at the spot

16、, invest in Japan, repatriate your yen earnings back into dollars at the spot rate prevailing in six months.c) take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contractd) take $1m, translate into yen at the forward rate, invest in Japan, hedge wit

17、h a short position in the spot contractAnswer: c)A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The one-year interest rate in the U.S. iS$ = 2% and in the euro zone the one-year interest rate isi? = 6%. The spot exchange rate is $1.25 = ?1.00 and the o-year forw

18、ard exchange rate is $1.20 = ?100. Show how to realize a certain dollar profit via covered interest arbitrage.a) Borrow $1,000,000 at 2%. Trade $1,000,000 for ?800,000; invest at i? = 6%； translate proceeds back at forward rate of $1.20 = ?1.00, gross proceeds = $1,017,600.b) Borrow ?800,000 at i? =

19、 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?848,000 back into euro at the forward rate of $1.20 = ?1.00. Net profit $2,400.c) Borrow ?800,000 at i? = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?850,000

20、 back into euro at the forward rate of $1.20 = ?1.00. Net profit ?2,000.d) Answers c) and b) are both correctAnswer: b)Gross proceeds in dollars = ?800,000$1.25?1.00(1.02)$1,020,000cost in euro = ?848,000 ?800,000 (1.06) Rationale:cost in dollars =?848,000 肛二0 $1,017,600?1.00net profit in dollars =

21、$1,020,000 $1,017,600 $2,40010 An Italian currency dealer has good credit ad can borrow ?800,000 for one year. The one-year interest rate in the U.S. is$ = 2% and in the euro zone the one-year interest rate isi? = 6%. The spot exchange rate is $1.25 = ?1.00 and the o-year forward exchange rate is $1

22、.20 = ?1.00. Show how toealize a certain euro-denominated profit via covered interest arbitrage.a) Borrow $1,000,000 at 2%. Trade $1,000,000 for ?800,000; invest at i? = 6%; translate proceeds back at forward rate of $1.20 = ?1.00, gross proceeds = $1,017,600.b) Borrow ?800,000 at i? = 6%; translate

23、 to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?848,000 back into euro at the forward rate of $1.20 = ?1.00. Net profit $2,400.c) Borrow ?800,000 at i? = 6%; translate to dollars at the spot, invest in the U.S. at i$ = 2% for one year; translate ?850,000 back into eur

24、o at the forward rate of $1.20 = ?1.00. Net profit ?2,000.d) Answers c) and b) are both correctAnswer: c)Rationale:-$1.25?1.00 -?800,000 一 (1.02)-?850,000?1.00$1.20?850,000 ?800,000 (1.06) ?2,00011 Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are

25、 considering the purchase of U.S. T-bills that yieldl.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¥he six month forward rate is $1.00 = 110.¥What must the interest rate in Japan (on an invest

26、ment of comparable risk) be before you are willing to consider investing there for six months?a) 11.991%b) 1.12%c) 7.45%d) 2.45%Answer: a)Rationale: The no-arbitrage condition is$1,000,000 (1.0181) = $1,000,000 慳 X1 + i¥ ) ;l100 $1.00¥10.c ¥00 3一、$1.001.0181 = X1 + i¥ ) x$1.00

27、65;10.的10 v$1.00 .y = 1.0181年x 1$1.00¥100iY = 11.991%12 Covered Interest Arbitrage (CIA) activities will result in a) an unstable international financial markets b) restoring equilibrium quite quicklyc) a disintermediationd) no effect on the marketAnswer: b).13 Suppose that the one-year interes

28、t 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 onear forward exchange rate, is $1.16/?. Assume that an arbitrageur can borrow up to $1,000,000.a) This is an example where interest rate parity holds.b) This is an example of an

29、 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.Answer: b)Rationale: equation 6.1:F($/?)S($ / ?)1 i$1 i?14 Suppose that the annual interest rate is 5.0 percent in the United Sta

30、tes and 3.5 percent in Germany, and that the spot exchange rate is $1.12/? and the forward exchange rate, with 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?a) $10,690b) $15,000c) $4

31、6,207d) $21,964.29Answer: d)Rationale: $21,964.29 = -$1,000,000 (K05) + $1,000,000 100 X1.035) $H6 $1.12?1.00Interest Rate Parity and Exchange Rate Determination15 Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and the one-ear forward exchange

32、 rate is $1.16/?. What must the spot exchange rate be?a) $1.1768/?b) $1.1434/7.c) $1.12/?d) None of the above.Answer: b)Rationale: equation 6.1:F j $1/?四 S($/?) $1.1434/7S($/?)1 i?S($/?)1.03516 A higher U.S. interest rate (i$ T ) will result ina) a stronger dollarb) a lower spot exchange rate (expre

33、ssed as foreign currency per U.S. dollar)c) both a) and b)d) None of the aboveAnswer: a)Rationale: 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

34、 number of U.S. dollars per unit of foreign currency).17 If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in the U.K. is i £ = 8 percent for the next year, uncovered IRP suggests thata) The pound is expected to depreciate against the dollar by about 3 perce

35、nt.b) The pound is expected to appreciate against the dollar by about 3 percent.c) The dollar is expected to appreciate against the pound by about 3 percent.d) a) and c) are both trueAnswer: d)18 A currency dealer has good credit and can brow either $1,000,000 or ?800,000 for one year. The one-year

36、interest rate in the U.S. is = 2% and in the euro zone the one-year interest rate is? = 6%. The oneyear forward exchange rate is $1.20 = ?1.00; what must the spot rate be to eliminate arbitrage opportunities?a) $1.2471 = ?1.00b) $1.20 = ?1.00c) $1.1547 = ?1.00d) none of the aboveAnswer:Rationale: S(

37、$/?)F($/?) (1 i?)$1.20106?1.00 1.061 i$1.02Reasons for Deviations from Interest Rate Parity19 Will an arbitrageur facing the following prices be able to make money?borrowinglending$5%4.5%?6%5.5%SpotForwardBid$1.00 = ?1.00$0.99 = ?1.00Ask$1.01 = ?1.00$1.00 = ?1.00a) Yes, borrow $1,000 at 5%; Trade fo

38、r ? at the ask spot rate $1.01 = ?1.00; Invest ?990.10 at 5.5%; Hedge this with a forward contract on ?1,044.55 at $0.99 = ?1.00; Receive $1.034.11b) Yes, borrow ?1,000 at 6%; Trade for $ at the bid spot rate $1.00 = ?1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on ?1,045 at $1.00

39、 = ?1.00.c) No; the transactions costs are too highd) None of the aboveAnswer: c) 20 If IRP fails to holda) Pressure from arbitrageurs should bring exchange rates and interest rates back into lineb) It may fail to hold due to transactions costsc) It may be due to government-imposed capital controlsd

40、) All of the aboveAnswer d)21 Although IRP tends to hold, it may not hold precisely all the time a) Due to transactions costs, like the bid ask spreadb) Due to asymmetric informationc) Due to capital controls imposed by governmentsd) a) and c)Answer: d)Purchasing Power Parity22 If a foreign county e

41、xperiences a hyperinflationa) Its currency will depreciateagainst stable currenciesb) Its currency may appreciateagainst stable currenciesc) Its currency may be unaffected-it ' s difficult to say.d) None of the aboveAnswer: a)23 As of today, the spot exchange rate is ?1.00 = $1.25 and the rates

42、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?a) ?1.00 = $1.2379b) ?1.00 = $1.2623c) ?1.00 = $0.9903d) $1.00 = ?1.2623Answer: a)Rationale: Take the spot rate and gross up each side by the respective

43、 inflation rates ?1.00 1.03 $1.25 1.02$1.25 1.02?1.00 $1.23791.0324 Purchasing Power Parity (PPP) theory states that:a) The exchange rate between currencies of two countries should be equal to the ratio of the countries ' price levels.b) As the purchasing power of a currency sharply declines (du

44、e to hyperinflation) that currency will depreciate against stable currencies.c) The prices of standard commodity baskets in two countries are not related.d) a) and b)Answer: d)PPP Deviations and the Real Exchange Rate25 If the annual inflation rate is 5.5 percent in the United States and 4 percent i

45、n the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is: a) 0.07 b) 0.98 c) -0.0198 d) 4.5Answer: b)Rationale: Equation 6.14:1$(1 e)(1£)1.051.03 1.040.9802Evidence on Purchasing Power Parity26 In view of the fact t

46、hat PPP is the manifestation of the law of one price applied to a standard commodity basket,a) It will hold only if the prices of the constituent commodities are equalized across countries in a given currencyb) It will hold only if the composition of the consumption basket is the same across countri

47、es.c) Both a) and b)d) None of the aboveAnswer: c)27 Some commodities never enter into international trade. Examples include:a) Nontradablesb) Haircutsc) Housingd) All of the aboveAnswer: d)28 Generally unfavorable evidence on PPP suggests thata) Substantial barriers to international commodity arbit

48、rage existb) Tariffs and quotas imposed on international trade can explain at least some of the evidencec) Shipping costs can make it difficult to directly compare commodity pricesd) All of the aboveAnswer: d)29 The price of a McDonald ' s Big Mac sandwicha) Is about the same in the 120 countrie

49、s that McDonalds does business inb) Varies considerably across the world in dollar termsc) Supports PPPd) None of the aboveAnswer: b)Rationale: 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.Fisher Effects30 The Fisher ef

50、fect can be written for the United States as:a)b)c)i$ = $ + E( $) + $ >E( $) $ = i$ + E( $) + i$ XE( $)q(1 e)(1 Qd)F($/?)1 i$S($/?)1 i?Answer: a)31 Forward parity states thata) Any forward premium or discount is equal to the expected change in the exchange rate.b) Any forward premium or discount

51、is equal to the actual change in the exchange ratec) 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 proportionate increase (decrease) in the interest rate in the country.Answer

52、: a)32 The International Fisher Effect suggests thata) 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 ratec) The nominal interest rate differential reflects the expected change in t

53、he exchange rate.d) An increase (decrease)in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.Answer: c)33 The Fisher effect states that:a) Any forward premium or discount is equal to the expected change in the exchange rate.

54、b) Any forward premium or discount is equal to the actual change in the exchange ratec) 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 proportionate increase (decrease) in the

55、interest rate in the country.Answer: d)Forecasting Exchange Rates34 If you could accurately and consistently forecast exchange ratesa) This would be a very handy thing.b) You could impress your dates.c) You could make a great deal of money.d) All of the aboveAnswer: d)Rationale: What date wouldn t b

56、e impressed with “ Htheryeebamboyn, tihns the eurowill appreciate by 5 percent against the dollar. ”?35 The main approaches to forecasting exchange rates are:a) Efficient market, Fundamental, and Technical approachesb) Efficient market and Technical approachesc) Efficient market and Fundamental appr

57、oachesd) Fundamental and Technical approachesAnswer: a)36 The benefit to forecasting exchange rates:a) Are greatest during periods of fixed exchange ratesb) Are nonexistent now that the euro and dollar are the biggest game in townc) Accrue to and are a vital concern for MNCs formulating international sourcing, production, financing and marketing strategies.d) All of the above.Answer: c)Efficient Market Approach37 The Efficient Markets Hypothesis statesa) Markets tend to evolve to low transactio