CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
怎么变成有钱人1. Give a full definition of arbitrage.
Answer: Arbitrage can be defined as the act of simultaneously buying and lling the same or equivalent asts or commodities for the purpo of making certain, guaranteed profits.
2. Discuss the implications of the interest rate parity for the exchange rate determination.
Answer: Assuming that the forward exchange rate is roughly an unbiad predictor of the future spot rate, IRP can be written as:
S = [(1 + I£)/(1 + I$)]E[St+1 It].
The exchange rate is thus determined by the relative interest rates, and the expected future spot rate, conditional on all the available information, It, as of the prent time. One thus can say that expectation is lf-fulfilling. Since the information t will be continuously updated as news hit the market, the exchange rate will exhibit a highly dynamic, random behavior.
3. Explain the conditions under which the forward exchange rate will be an unbiad predictor of the future spot exchange rate.
Answer: The forward exchange rate will be an unbiad predictor of the future spot rate if (I) the risk premium is insignificant and (ii) foreign exchange markets are informationally efficient.
4. Explain the purchasing power parity, both the absolute and relative versions. What caus the deviations from the purchasing power parity?
Answer: The absolute version of purchasing power parity (PPP):
S = P$/P£.
The relative version is:
e = $ - £.
PPP can be violated if there are barriers to international trade or if people in different countries have different consumption taste. PPP is the law of one price applied to a standard consumption basket.
8. Explain the random walk model for exchange rate forecasting. Can it be consistent with the technical analysis?
Answer: The random walk model predicts that the current exchange rate will be the best predictor of the future exchange rate. An implication of the model is that past history of the exchange rate is of no value in predicting future exchange rate. The model thus is inconsistent with the technical analysis which tries to utilize past history in predicting the future exchange rate.
传统习俗*9. Derive and explain the monetary approach to exchange rate determination.
Answer: The monetary approach is associated with the Chicago School of Economics. It is bad on two tenets: purchasing power parity and the quantity theory of money. Combing the two theories allows for stating, say, the $/£ spot exchange rate as:一人在内打一个字
S($/£) = (M$篮球社/M£)(V$/V£)(y£/y$),
where M denotes the money supply, V the velocity of money, and y the national aggregate output. The theory holds that what matters in exchange rate determination are:
1. The relative money supply,
2. The relative velocities of monies, and高一生物必修二
3. The relative national outputs.
一月一日非今天打一字10. CFA question: 1997, Level 3.孔子的著名故事
A.Explain the following three concepts of purchasing power parity (PPP):
a. The law of one price.
b. Absolute PPP.
c. Relative PPP.
B.Evaluate the ufulness of relative PPP in predicting movements in foreign exchange rates on:
a.Short-term basis (for example, three months)
b.Long-term basis (for example, six years)
Answer:
A.a. The law of one price (LOP) refers to the international arbitrage condition for the stan
织围巾起针dard consumption basket. LOP requires that the consumption basket should be lling for the same price in a given currency across countries.
A.b. Absolute PPP holds that the price level in a country is equal to the price level in another country
times the exchange rate between the two countries.
A.c. Relative PPP holds that the rate of exchange rate change between a pair of countries is about equal
to the difference in inflation rates of the two countries.
B.a. PPP is not uful for predicting exchange rates on the short-term basis mainly becau
international commodity arbitrage is a time-consuming process.
B. b. PPP is uful for predicting exchange rates on the long-term basis.
PROBLEMS
1. Suppo that the treasurer of IBM has an extra cash rerve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 6 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?
