PPP, IFE and IRP
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This document discusses several economic theories related to exchange rates between Pakistan and the US: 1) Purchasing power parity (PPP) suggests exchange rates adjust for inflation, but it does not hold for Pakistan-US rates due to imperfect substitutes between goods and other factors influencing exchange rates. 2) Interest rate parity (IRP) equalizes interest rate differentials and forward/spot exchange rates, but increasing interest rates in one country increase forward contracts for its currency. 3) Interest rate expectation theory (IFE) describes how interest rate changes, rather than just inflation, impact nominal and real interest rates and exchange rates. Currencies with higher interest rates are expected to depreciate.
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IRP, PPP, IFE
The document discusses interest rate parity and covered interest arbitrage. It provides definitions and explanations of these concepts. Specifically:
1) Interest rate parity is a condition where the interest rate differential between two countries equals the difference between the forward exchange rate and the spot exchange rate.
2) Covered interest arbitrage involves borrowing in the lower yielding currency, converting to the higher yielding currency, and hedging the exchange risk through a forward contract.
3) Market forces will eliminate opportunities for covered interest arbitrage by adjusting interest rates and exchange rates until parity is reached.
Relationships among inflation and exchange rate
This document discusses theories related to foreign exchange rates, including purchasing power parity (PPP), interest rate parity (IRP), and the international Fisher effect (IFE). PPP states that exchange rates should adjust over time to account for inflation differences between countries. IRP suggests that interest rate differentials should equal expected changes in exchange rates. IFE describes how real interest rates should move with inflation according to nominal interest rates. Deviations from these theories can occur due to factors like trade barriers, market imperfections, and expectations of future exchange rates.
International parity condition
This document summarizes several international parity conditions:
1) Purchasing power parity states that identical goods should sell for the same price worldwide when accounting for transportation costs, taxes, and other factors. It is a manifestation of the law of one price applied internationally.
2) Absolute and relative purchasing power parity refer to comparing the price of a standard basket of goods across currencies and changes in inflation affecting exchange rates.
3) Interest rate parity or the Fisher effect relates nominal interest rates, real interest rates, and expected inflation rates both within and between countries. It posits that nominal rates equal real rates plus inflation.
International parity-conditions-9-feb-2010
This document discusses several international parity conditions that can be used to predict foreign exchange rates:
1. Purchasing power parity (PPP) states that exchange rates should equalize price levels between countries based on a basket of goods.
2. The international Fisher effect (IFE) states that exchange rates adjust to equalize interest rate differentials between countries.
3. Interest rate parity (IRP) focuses on spot and forward exchange rates between countries' money and bond markets and establishes a break-even condition for returns.
4. Forward rates are expected to be an unbiased predictor of future spot rates according to the expectations theory of exchange rates.
These parity conditions are interrelated
Relationships between Inflation, Interest Rates, and Exchange Rates
The document discusses purchasing power parity (PPP) theory and the international Fisher effect (IFE) theory. PPP theory states that inflation rate differentials between countries will lead to changes in exchange rates as the high inflation country's currency depreciates. IFE theory similarly argues that interest rate differentials, which often correlate with expected inflation differentials, will cause the high interest rate currency to depreciate. Both theories predict that the currency experiencing higher inflation or interest rates will lose value against other currencies. The document also provides derivations of the PPP and IFE formulas to calculate expected exchange rate changes based on inflation or interest rate differentials.
International economic ch15
The document discusses theories of long-run exchange rates and purchasing power parity (PPP). It introduces the law of one price and PPP, which predicts that exchange rates will equal the ratio of countries' price levels. Empirical tests find weak support for PPP and the law of one price. Real exchange rates, interest rates, and expected inflation differentials also influence long-run exchange rates. International differences in output, prices, and monetary policies can cause deviations from PPP in both the short and long run.
Purchasing Power Parity
Purchasing power parity (PPP) theory focuses on the relationship between inflation and exchange rates. It is based on the law of one price, which states that identical goods should have the same price in different markets. Absolute PPP postulates that the equilibrium exchange rate between two currencies equals the ratio of their price levels. Thus, similar products should have equal prices when measured in a common currency according to absolute PPP. In reality, deviations from absolute PPP can occur due to things like transport costs or trade barriers.
International parity condition
The document discusses several foreign exchange parity conditions and arbitrage activities:
1) Purchasing power parity states that exchange rates will adjust to reflect differences in inflation rates between countries. Absolute PPP says price levels should be equal globally, while relative PPP says exchange rates adjust for domestic and foreign price levels.
2) Interest rate parity establishes that forward rates differ from spot rates by an amount offsetting interest rate differentials, eliminating arbitrage profits.
3) Arbitrage activities seek to profit from temporary deviations from these parity conditions by exploiting differences in currency prices across locations or markets. This helps drive prices back into alignment.
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IRP, PPP, IFE
The document discusses interest rate parity and covered interest arbitrage. It provides definitions and explanations of these concepts. Specifically:
1) Interest rate parity is a condition where the interest rate differential between two countries equals the difference between the forward exchange rate and the spot exchange rate.
2) Covered interest arbitrage involves borrowing in the lower yielding currency, converting to the higher yielding currency, and hedging the exchange risk through a forward contract.
3) Market forces will eliminate opportunities for covered interest arbitrage by adjusting interest rates and exchange rates until parity is reached.
Relationships among inflation and exchange rate
This document discusses theories related to foreign exchange rates, including purchasing power parity (PPP), interest rate parity (IRP), and the international Fisher effect (IFE). PPP states that exchange rates should adjust over time to account for inflation differences between countries. IRP suggests that interest rate differentials should equal expected changes in exchange rates. IFE describes how real interest rates should move with inflation according to nominal interest rates. Deviations from these theories can occur due to factors like trade barriers, market imperfections, and expectations of future exchange rates.
International parity condition
This document summarizes several international parity conditions:
1) Purchasing power parity states that identical goods should sell for the same price worldwide when accounting for transportation costs, taxes, and other factors. It is a manifestation of the law of one price applied internationally.
2) Absolute and relative purchasing power parity refer to comparing the price of a standard basket of goods across currencies and changes in inflation affecting exchange rates.
3) Interest rate parity or the Fisher effect relates nominal interest rates, real interest rates, and expected inflation rates both within and between countries. It posits that nominal rates equal real rates plus inflation.
International parity-conditions-9-feb-2010
This document discusses several international parity conditions that can be used to predict foreign exchange rates:
1. Purchasing power parity (PPP) states that exchange rates should equalize price levels between countries based on a basket of goods.
2. The international Fisher effect (IFE) states that exchange rates adjust to equalize interest rate differentials between countries.
3. Interest rate parity (IRP) focuses on spot and forward exchange rates between countries' money and bond markets and establishes a break-even condition for returns.
4. Forward rates are expected to be an unbiased predictor of future spot rates according to the expectations theory of exchange rates.
These parity conditions are interrelated
Relationships between Inflation, Interest Rates, and Exchange Rates
The document discusses purchasing power parity (PPP) theory and the international Fisher effect (IFE) theory. PPP theory states that inflation rate differentials between countries will lead to changes in exchange rates as the high inflation country's currency depreciates. IFE theory similarly argues that interest rate differentials, which often correlate with expected inflation differentials, will cause the high interest rate currency to depreciate. Both theories predict that the currency experiencing higher inflation or interest rates will lose value against other currencies. The document also provides derivations of the PPP and IFE formulas to calculate expected exchange rate changes based on inflation or interest rate differentials.
International economic ch15
The document discusses theories of long-run exchange rates and purchasing power parity (PPP). It introduces the law of one price and PPP, which predicts that exchange rates will equal the ratio of countries' price levels. Empirical tests find weak support for PPP and the law of one price. Real exchange rates, interest rates, and expected inflation differentials also influence long-run exchange rates. International differences in output, prices, and monetary policies can cause deviations from PPP in both the short and long run.
Purchasing Power Parity
Purchasing power parity (PPP) theory focuses on the relationship between inflation and exchange rates. It is based on the law of one price, which states that identical goods should have the same price in different markets. Absolute PPP postulates that the equilibrium exchange rate between two currencies equals the ratio of their price levels. Thus, similar products should have equal prices when measured in a common currency according to absolute PPP. In reality, deviations from absolute PPP can occur due to things like transport costs or trade barriers.
International parity condition
The document discusses several foreign exchange parity conditions and arbitrage activities:
1) Purchasing power parity states that exchange rates will adjust to reflect differences in inflation rates between countries. Absolute PPP says price levels should be equal globally, while relative PPP says exchange rates adjust for domestic and foreign price levels.
2) Interest rate parity establishes that forward rates differ from spot rates by an amount offsetting interest rate differentials, eliminating arbitrage profits.
3) Arbitrage activities seek to profit from temporary deviations from these parity conditions by exploiting differences in currency prices across locations or markets. This helps drive prices back into alignment.
Purchasing power parity
The document discusses the concept of purchasing power parity (PPP). It defines PPP as the exchange rate between two currencies that would equalize the purchasing power of the currencies in their respective countries. The document notes that under PPP, a given amount of one currency should have the same purchasing power whether used directly to purchase goods in that country or converted to the other currency at the PPP rate. It then asks several questions about how inflation, interest rates, and other factors may impact exchange rates. The rest of the document provides explanations of absolute and relative PPP, how PPP is used to make cross-country comparisons, and some limitations of the PPP theory.
Interest rate parity 1
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
Exchange rate theories
This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
The traditional approach assumes an equilibrium exchange rate where a country's imports balance its exports. If imports exceed exports, the exchange rate will fall to make the country's exports cheaper and imports more expensive, balancing trade.
PPP has both an absolute and relative form. In absolute PPP, similar goods should have the same price in different currencies. Relative PPP recognizes market imperfections but holds that inflation rates between countries will offset exchange rate changes over time.
IRP links exchange and money markets, stating that interest rate differences between countries should equal forward exchange
INTEREST RATE PARITY
INTEREST RATE PARITY, ECONOMIC ENVIRONMENT FOR BUSINESS, ECONOMIC INDICATORS, HEDGING EXCHANGE RISK, EXCHANGE RATES, USD/PKR RATES, PAKISTAN, FOREIGN EXCHANGE, STATE BANK, IMF RECOMMENDS, BUSINESS ADMINISTRATION, MANAGEMENT SCIENCE, EDUCATION AND LEARNING, MBA, BBA,
Interest Rate Parity and Purchasing Power Parity
The document discusses interest rate parity (IRP) and purchasing power parity (PPP). IRP states that interest rate differences between countries equal the forward exchange rate minus the spot rate. PPP holds that currency exchange rates adjust so goods cost the same across countries when prices are converted to the same currency. Violations of IRP create arbitrage opportunities. Factors like inflation rates, economic conditions, and monetary policies influence IRP and PPP over time. Formulas are provided for calculating IRP and expected future exchange rates under PPP.
8. Relationships among Inflation, Interest Rates and Exchange Rates.pptx
This document discusses theories related to exchange rates, interest rates, and inflation rates. It covers the Purchasing Power Parity (PPP) theory, which posits that exchange rates should adjust to equalize inflation rates between countries. It also discusses the International Fisher Effect (IFE) theory, which links interest rate differentials to expected inflation differentials and expected exchange rate movements. Graphs and equations are provided to illustrate the relationships between these economic variables under each theory. The document analyzes factors that can cause deviations from perfect parity under the theories.
Forex Market - Risk Exposure
This document discusses foreign exchange risk and its management. It defines foreign exchange as the conversion of one currency to another, which poses risks from exchange rates and timing. Risk management involves identifying and mitigating uncertainty in investments. Foreign exchange risk specifically refers to unanticipated changes in exchange rates that can harm multinational businesses and investors. There are four main types of foreign exchange risk exposures: transaction, economic, translation, and contingent. The document also briefly discusses measuring financial risk and conditions where foreign exchange risk is irrelevant.
Relationship between Inflation, Interest Rates, and Exchange Rates
explaining what is Purchasing Power Parity, International Fisher Effect, Interest Parity, and their implication for exchange rate changes.
International financial market
This document provides an overview of several international financial markets including: the foreign exchange market, Eurocurrency market, Eurocredit market, Eurobond market, and international stock markets. It discusses the motives for using these markets such as taking advantage of favorable interest rates or currency movements. The key characteristics and operations of each market are described, including how currency exchange rates are determined in the foreign exchange market and how various types of international bonds are issued.
Exchange Rate Theory
There are three main theories of exchange rate determination discussed in the document:
1) Purchasing power parity (PPP) theory states that exchange rates should adjust to equalize the prices of identical goods between countries when translated to a common currency.
2) Interest rate parity theory states that interest rate differentials between countries should equal expected changes in the exchange rate.
3) Balance of payments theory explains exchange rate movements through a country's balance of trade and capital flows.
Forecasting Exchange Rates
here we are trying to explain how firms can benefit from forecasting exchange rate, to describe common technique that used to forecast, how to evaluate forecasting performance
4.6 International Economics Exchange Rates
This document discusses exchange rates and factors that influence them. It explains flexible and fixed exchange rate systems, and the advantages and disadvantages of each. Flexible exchange rates can fluctuate due to changes in tastes, incomes, prices, speculation, or interest rates. A flexible rate helps correct trade imbalances but creates uncertainty. Maintaining a fixed rate requires currency intervention, trade policies, or domestic economic adjustments.
International Finance
The document discusses India's balance of payments. It includes:
1. The current account which covers merchandise (exports and imports) and invisibles (services, transfers, investment income).
2. The capital account which includes foreign investment, loans, banking capital, and other capital flows.
3. Errors and omissions and the overall balance which is the sum of the current account, capital account and errors/omissions.
Investment climate & fdi 15 05-2014 - copy
This document summarizes an presentation on investment climate and foreign direct investment (FDI) in Bangladesh. It defines investment climate and its key features, including macroeconomic factors, governance, and infrastructure. It discusses what FDI is and its components. The current situation of low FDI in Bangladesh is described, noting factors such as weak governance and infrastructure challenges. Sectoral opportunities for FDI and investment incentives in Bangladesh are outlined. Recent FDI inflows into Bangladesh and the roles of investment facilitation agencies are also summarized.
International economic ch14
1) This chapter discusses how money supply, interest rates, and exchange rates are interrelated in both the short run and long run.
2) In the short run, changes to a country's money supply will affect its interest rates, which then feed through to impact exchange rates via interest rate parity. An increase in money supply lowers interest rates and causes currency depreciation.
3) In the long run, a permanent increase in the money supply leads to a proportional increase in the price level but does not affect real output or interest rates. Higher long-term inflation correlates with higher monetary growth across countries.
Balance of payment
This document discusses India's balance of payments. It begins by defining the balance of payments as a systematic record of all economic transactions between residents of a country and the rest of the world. It then explains the importance of the balance of payments for understanding currency demand and supply, exchange rates, and monetary policy shifts. The document outlines the key components of a balance of payments statement, including the current account, capital account, and errors and omissions. It also discusses accounting treatments for balance of payments surpluses and deficits and the effects of disequilibriums on the economy. In less than 3 sentences.
Purchasing power parity theory
The document discusses the Purchasing Power Parity (PPP) theory, which states that exchange rates between currencies are determined by their relative purchasing power. It explains that under PPP, exchange rates adjust to changes in inflation so that the same goods cost the same in each country when prices are converted to a common currency. The document outlines the absolute and relative versions of PPP theory and notes some limitations, such as differences in goods baskets between countries. An example is provided to demonstrate how exchange rates adjust proportionally according to changes in domestic and foreign inflation rates under relative PPP.
Effective exchange rate and arbitrage
This document discusses arbitrage, nominal effective exchange rates (NEER), and real effective exchange rates (REER). It provides the following key points:
1) Arbitrage involves buying the same asset in different markets simultaneously to profit from price discrepancies. Triangular arbitrage exploits exchange rate discrepancies across currency pairs.
2) NEER is a weighted average exchange rate that indicates a country's international competitiveness. It incorporates exchange rates against a basket of currencies weighted by trade volumes.
3) REER adjusts the NEER for inflation differences between countries to reflect exchange rate changes in real terms. When exchange rates are fixed, there is no difference between NEER and REER since other economic factors
Introduction to international finance and International economy
International economics is a field of study that assesses the implications of international trade, international investment, and international borrowing and lending.
There are two broad sub-fields within the discipline: international trade and international finance
Present value
There are three main reasons why a dollar in the future is worth less than a dollar today:
1. People prefer present consumption over future consumption
2. Inflation decreases the value of currency over time
3. Uncertainty associated with future cash flows decreases their value
The discount rate incorporates these factors and is used to discount future cash flows to their present value. A higher discount rate leads to a lower present value for future cash flows. Discounting future cash flows converts them to present value dollars.
CH 8 - RELATIONSHIPS AMONG INFLATION. INTEREST RATES. AND EXCHANGE RATES.pptx
This document discusses interpretations of purchasing power parity (PPP), including absolute and relative PPP. Absolute PPP suggests exchange rates should equalize prices of identical goods between countries, implying a direct relationship between inflation differentials and exchange rate movements. Relative PPP considers changes in relative prices over time and focuses on inflation differentials as predictors of future exchange rate movements. The interpretations of PPP provide insights into the relationship between inflation, exchange rates, and purchasing power.
Exchange rate determination.
This paper develops an equilibrium model of the determination of exchange rates and prices of goods. Changes in relative prices due to supply or demand shifts induce changes in exchange rates and deviations from purchasing power parity. These changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by governments to affect the terms of trade through foreign exchange market operations. The model emphasizes the role of relative price changes due to real disturbances and how these changes affect both exchange rates and the terms of trade through shifts in supply and demand. Government interventions in foreign exchange markets cannot influence exchange rates if the relationship between exchange rates and terms of trade is due to shifts in real supply and demand for domestic and foreign goods.
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Purchasing power parity
The document discusses the concept of purchasing power parity (PPP). It defines PPP as the exchange rate between two currencies that would equalize the purchasing power of the currencies in their respective countries. The document notes that under PPP, a given amount of one currency should have the same purchasing power whether used directly to purchase goods in that country or converted to the other currency at the PPP rate. It then asks several questions about how inflation, interest rates, and other factors may impact exchange rates. The rest of the document provides explanations of absolute and relative PPP, how PPP is used to make cross-country comparisons, and some limitations of the PPP theory.
Interest rate parity 1
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
Exchange rate theories
This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
The traditional approach assumes an equilibrium exchange rate where a country's imports balance its exports. If imports exceed exports, the exchange rate will fall to make the country's exports cheaper and imports more expensive, balancing trade.
PPP has both an absolute and relative form. In absolute PPP, similar goods should have the same price in different currencies. Relative PPP recognizes market imperfections but holds that inflation rates between countries will offset exchange rate changes over time.
IRP links exchange and money markets, stating that interest rate differences between countries should equal forward exchange
INTEREST RATE PARITY
INTEREST RATE PARITY, ECONOMIC ENVIRONMENT FOR BUSINESS, ECONOMIC INDICATORS, HEDGING EXCHANGE RISK, EXCHANGE RATES, USD/PKR RATES, PAKISTAN, FOREIGN EXCHANGE, STATE BANK, IMF RECOMMENDS, BUSINESS ADMINISTRATION, MANAGEMENT SCIENCE, EDUCATION AND LEARNING, MBA, BBA,
Interest Rate Parity and Purchasing Power Parity
The document discusses interest rate parity (IRP) and purchasing power parity (PPP). IRP states that interest rate differences between countries equal the forward exchange rate minus the spot rate. PPP holds that currency exchange rates adjust so goods cost the same across countries when prices are converted to the same currency. Violations of IRP create arbitrage opportunities. Factors like inflation rates, economic conditions, and monetary policies influence IRP and PPP over time. Formulas are provided for calculating IRP and expected future exchange rates under PPP.
8. Relationships among Inflation, Interest Rates and Exchange Rates.pptx
This document discusses theories related to exchange rates, interest rates, and inflation rates. It covers the Purchasing Power Parity (PPP) theory, which posits that exchange rates should adjust to equalize inflation rates between countries. It also discusses the International Fisher Effect (IFE) theory, which links interest rate differentials to expected inflation differentials and expected exchange rate movements. Graphs and equations are provided to illustrate the relationships between these economic variables under each theory. The document analyzes factors that can cause deviations from perfect parity under the theories.
Forex Market - Risk Exposure
This document discusses foreign exchange risk and its management. It defines foreign exchange as the conversion of one currency to another, which poses risks from exchange rates and timing. Risk management involves identifying and mitigating uncertainty in investments. Foreign exchange risk specifically refers to unanticipated changes in exchange rates that can harm multinational businesses and investors. There are four main types of foreign exchange risk exposures: transaction, economic, translation, and contingent. The document also briefly discusses measuring financial risk and conditions where foreign exchange risk is irrelevant.
Relationship between Inflation, Interest Rates, and Exchange Rates
explaining what is Purchasing Power Parity, International Fisher Effect, Interest Parity, and their implication for exchange rate changes.
International financial market
This document provides an overview of several international financial markets including: the foreign exchange market, Eurocurrency market, Eurocredit market, Eurobond market, and international stock markets. It discusses the motives for using these markets such as taking advantage of favorable interest rates or currency movements. The key characteristics and operations of each market are described, including how currency exchange rates are determined in the foreign exchange market and how various types of international bonds are issued.
Exchange Rate Theory
There are three main theories of exchange rate determination discussed in the document:
1) Purchasing power parity (PPP) theory states that exchange rates should adjust to equalize the prices of identical goods between countries when translated to a common currency.
2) Interest rate parity theory states that interest rate differentials between countries should equal expected changes in the exchange rate.
3) Balance of payments theory explains exchange rate movements through a country's balance of trade and capital flows.
Forecasting Exchange Rates
here we are trying to explain how firms can benefit from forecasting exchange rate, to describe common technique that used to forecast, how to evaluate forecasting performance
4.6 International Economics Exchange Rates
This document discusses exchange rates and factors that influence them. It explains flexible and fixed exchange rate systems, and the advantages and disadvantages of each. Flexible exchange rates can fluctuate due to changes in tastes, incomes, prices, speculation, or interest rates. A flexible rate helps correct trade imbalances but creates uncertainty. Maintaining a fixed rate requires currency intervention, trade policies, or domestic economic adjustments.
International Finance
The document discusses India's balance of payments. It includes:
1. The current account which covers merchandise (exports and imports) and invisibles (services, transfers, investment income).
2. The capital account which includes foreign investment, loans, banking capital, and other capital flows.
3. Errors and omissions and the overall balance which is the sum of the current account, capital account and errors/omissions.
Investment climate & fdi 15 05-2014 - copy
This document summarizes an presentation on investment climate and foreign direct investment (FDI) in Bangladesh. It defines investment climate and its key features, including macroeconomic factors, governance, and infrastructure. It discusses what FDI is and its components. The current situation of low FDI in Bangladesh is described, noting factors such as weak governance and infrastructure challenges. Sectoral opportunities for FDI and investment incentives in Bangladesh are outlined. Recent FDI inflows into Bangladesh and the roles of investment facilitation agencies are also summarized.
International economic ch14
1) This chapter discusses how money supply, interest rates, and exchange rates are interrelated in both the short run and long run.
2) In the short run, changes to a country's money supply will affect its interest rates, which then feed through to impact exchange rates via interest rate parity. An increase in money supply lowers interest rates and causes currency depreciation.
3) In the long run, a permanent increase in the money supply leads to a proportional increase in the price level but does not affect real output or interest rates. Higher long-term inflation correlates with higher monetary growth across countries.
Balance of payment
This document discusses India's balance of payments. It begins by defining the balance of payments as a systematic record of all economic transactions between residents of a country and the rest of the world. It then explains the importance of the balance of payments for understanding currency demand and supply, exchange rates, and monetary policy shifts. The document outlines the key components of a balance of payments statement, including the current account, capital account, and errors and omissions. It also discusses accounting treatments for balance of payments surpluses and deficits and the effects of disequilibriums on the economy. In less than 3 sentences.
Purchasing power parity theory
The document discusses the Purchasing Power Parity (PPP) theory, which states that exchange rates between currencies are determined by their relative purchasing power. It explains that under PPP, exchange rates adjust to changes in inflation so that the same goods cost the same in each country when prices are converted to a common currency. The document outlines the absolute and relative versions of PPP theory and notes some limitations, such as differences in goods baskets between countries. An example is provided to demonstrate how exchange rates adjust proportionally according to changes in domestic and foreign inflation rates under relative PPP.
Effective exchange rate and arbitrage
This document discusses arbitrage, nominal effective exchange rates (NEER), and real effective exchange rates (REER). It provides the following key points:
1) Arbitrage involves buying the same asset in different markets simultaneously to profit from price discrepancies. Triangular arbitrage exploits exchange rate discrepancies across currency pairs.
2) NEER is a weighted average exchange rate that indicates a country's international competitiveness. It incorporates exchange rates against a basket of currencies weighted by trade volumes.
3) REER adjusts the NEER for inflation differences between countries to reflect exchange rate changes in real terms. When exchange rates are fixed, there is no difference between NEER and REER since other economic factors
Introduction to international finance and International economy
International economics is a field of study that assesses the implications of international trade, international investment, and international borrowing and lending.
There are two broad sub-fields within the discipline: international trade and international finance
Present value
There are three main reasons why a dollar in the future is worth less than a dollar today:
1. People prefer present consumption over future consumption
2. Inflation decreases the value of currency over time
3. Uncertainty associated with future cash flows decreases their value
The discount rate incorporates these factors and is used to discount future cash flows to their present value. A higher discount rate leads to a lower present value for future cash flows. Discounting future cash flows converts them to present value dollars.
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8. Relationships among Inflation, Interest Rates and Exchange Rates.pptx
8. Relationships among Inflation, Interest Rates and Exchange Rates.pptx
Relationship between Inflation, Interest Rates, and Exchange Rates
Relationship between Inflation, Interest Rates, and Exchange Rates
Introduction to international finance and International economy
Introduction to international finance and International economy
Similar a PPP, IFE and IRP
CH 8 - RELATIONSHIPS AMONG INFLATION. INTEREST RATES. AND EXCHANGE RATES.pptx
This document discusses interpretations of purchasing power parity (PPP), including absolute and relative PPP. Absolute PPP suggests exchange rates should equalize prices of identical goods between countries, implying a direct relationship between inflation differentials and exchange rate movements. Relative PPP considers changes in relative prices over time and focuses on inflation differentials as predictors of future exchange rate movements. The interpretations of PPP provide insights into the relationship between inflation, exchange rates, and purchasing power.
Exchange rate determination.
This paper develops an equilibrium model of the determination of exchange rates and prices of goods. Changes in relative prices due to supply or demand shifts induce changes in exchange rates and deviations from purchasing power parity. These changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by governments to affect the terms of trade through foreign exchange market operations. The model emphasizes the role of relative price changes due to real disturbances and how these changes affect both exchange rates and the terms of trade through shifts in supply and demand. Government interventions in foreign exchange markets cannot influence exchange rates if the relationship between exchange rates and terms of trade is due to shifts in real supply and demand for domestic and foreign goods.
International Economics
International movements-meaning-Export & import of merchandise & services-International investment-International Payments, Rate of exchange, Economic integration
Factor Affecting exchange rate and Theories of exchange rate
It explains the following topics
Factor Affecting the exchange rate
CURRENCY DEPRECIATION VS.CURRENCY APPRECIATION
Foreign exchange
Theories of exchange rate
Irp ppp ife
Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries. A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Covered interest arbitrage allows an investor to exploit interest rate differentials between currencies by investing in the higher yielding currency while hedging exchange rate risk through a forward contract. The international fisher effect suggests that interest rate differentials between countries may be the result of differences in expected inflation, and that exchange rates will adjust to changes in expected inflation differentials.
Irp ppp ife
Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries. A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Covered interest arbitrage allows an investor to exploit interest rate differentials between currencies by investing in the higher yielding currency and hedging exchange risk through a forward contract. Once market forces eliminate arbitrage opportunities, interest rate parity is achieved where exchange rates align so that covered interest arbitrage is no longer feasible.
Foreign exchange and balance of payments
Foreign exchange and balance of payments documents key concepts including:
- Foreign exchange refers to international monetary exchange according to Hartly Wethers. It is important for services, imports, transferring purchasing power and funds.
- The Foreign Exchange Regulation Act of 1973 and the Foreign Exchange Management Act of 1999 aimed to regulate and manage foreign exchange transactions in India.
- The objectives of FEMA include promoting an orderly foreign exchange market, facilitating external trade and payments, and removing imbalances in payments.
- Foreign exchange rates are determined by theories like purchasing power parity, balance of payments, and monetary approaches based on demand and supply of money and goods.
Factors affecting exchange_rate
The document discusses factors that affect exchange rates, including inflation, interest rates, income levels, and government control. It analyzes these factors using a multiple regression model with exchange rate as the dependent variable and the other factors as independent variables. The results show that inflation, interest rates, and income levels significantly influence exchange rates, while government control is insignificant. Understanding what drives exchange rate movement is important for organizations involved in international business.
Factors Influencing Exchange Rate: An Empirical Evidence from Bangladesh
This study examines factors that influence exchange rate fluctuations in Bangladesh from 1987 to 2017. It analyzes the impact of remittances, GDP growth, and international trade on the real effective exchange rate. Stationarity tests and Johansen cointegration tests were used to examine the long-run relationship between the variables. VAR models and Granger causality tests found that remittances, GDP growth, and international trade significantly impact exchange rate fluctuations, explaining over 60% of variations. FMOLS tests concluded that GDP growth and international trade positively affect the exchange rate, while remittances have a negative effect. In summary, increases in GDP growth and international trade are found to increase exchange rate volatility, whereas increases in remittances decrease exchange
International Financial Management
This document provides an overview of exchange rate theories and derivatives. It discusses traditional exchange rate theories based on trade flows and the purchasing power parity theory. It also covers interest rate parity theory, international fisher effect theory, and the uncovered and unbiased forward rate theories. Types of derivatives discussed include forwards, futures, options, and swaps. Forward rate agreements are introduced as cash-settled over-the-counter contracts where one party fixes an interest rate for a future period.
UZ Exchange rates and International Parity Relationships.pptx
This document discusses foreign exchange rates and international parity relationships. It covers several topics:
1) It describes different types of foreign exchange risks including transaction risk, translational risk, and risks from foreign payables, receivables, and assets/liabilities.
2) It explains concepts like floating and managed exchange rate regimes, real exchange rates, and real exchange rate appreciation and depreciation.
3) It discusses foreign exchange markets, interest rate differentials, the Fisher effect relating nominal and real interest rates, and international interest rate parity.
7 foreign exchange market
- The foreign exchange market involves the trading of one country's currency for another. It determines exchange rates through supply and demand.
- In the long run, exchange rates are determined by theories like purchasing power parity which says exchange rates will adjust over time to reflect differences in inflation. The law of one price also applies to keep identical goods priced the same globally.
- In the short run, exchange rates are the price of one country's bank deposits in terms of another's. The current and expected future exchange rates determine demand for each country's deposits and set the equilibrium exchange rate where supply meets demand.
Intl parity cond.
The document discusses several concepts related to international finance including:
1) Purchasing power parity, interest rate parity, and the Fisher effect which relate exchange rates, interest rates, and inflation rates between countries.
2) Arbitrage opportunities that can arise from differences in exchange rates quoted by different traders.
3) Conditions like the law of one price that must hold for arbitrage to exist.
4) Absolute and relative forms of purchasing power parity and limitations of the theory.
5) How interest rate parity explains differences between spot and forward exchange rates.
relation of PPP and IRP
This document discusses uncovered interest rate parity (UIRP) and covered interest rate parity (CIRP), which relate interest rates between countries to exchange rates. UIRP refers to parity when exposed to exchange rate risk, while CIRP uses forward contracts to eliminate exchange rate risk. The document provides an example where UK interest rates are 2% and Japanese rates are 1%, requiring the pound to depreciate 1% against the yen to avoid arbitrage opportunities. It also discusses purchasing power parity (PPP), which estimates exchange rates needed for currencies to have equal purchasing power based on market baskets of goods. PPP helps minimize misleading international comparisons that can arise from using market exchange rates alone.
Exchange rate forecasting techniques.
Firms forecast exchange rates for hedging decisions, short-term financing decisions, capital budgeting decisions, and long-term financing decisions. There are two main approaches - fundamental analysis, which studies macroeconomic variables like inflation and GDP growth, and technical analysis, which analyzes historical exchange rate data. Factors like inflation rates, purchasing power parity, GNP growth, monetary policy, and relative economic strength between countries can influence exchange rate forecasts. No single approach can perfectly predict future exchange rates.
Effect of dollar fluctuation on Indian trade.
How the change in dollar value in comparison to Indian rupee affects the Indian trade (export & import).
EXCHANGE RATE DETERMINATION
This document provides information about exchange rate determination. It begins with welcoming the audience and introducing the presenters. It then defines exchange rates and discusses their importance for international business. It describes the three main types of exchange rate systems - fixed, floating, and managed - and discusses their advantages and disadvantages. Finally, it outlines several theories for how exchange rates are determined, such as purchasing power parity theory and the balance of payments approach. It also lists some key determinants of exchange rates and discusses the impact of exchange rate fluctuations on multinational corporations' decisions.
Chapter 4 Price Levels and the Exchange Rate in the Long run.pdf
Chapter 4 Price Levels and the Exchange Rate in the Long run - ENG
Lecturer: Trần Việt Dung - UEB
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Exchange mechanism
The document discusses various aspects of foreign exchange rates including:
1. Exchange rates are the ratio between two currencies and are quoted regularly in publications. Major world currencies include the USD, Euro, Yen, GBP, etc.
2. Exchange rates can be quoted directly or indirectly. Direct quotes place the domestic currency first while indirect quotes place it second.
3. Spot exchange rates are determined by the interplay of demand and supply forces in the foreign exchange market. Factors like the balance of payments, inflation, interest rates, and others influence spot rates.
Chapter 7
The Foreign Exchange Management Act (FEMA) was introduced in 1999 to replace the earlier Foreign Exchange Regulation Act (FERA). FEMA came into effect on June 1, 2000 with the main objectives of consolidating foreign exchange laws, facilitating external trade and payments, and promoting an orderly foreign exchange market in India. FEMA applies throughout India and also to Indian residents' overseas offices and agencies. It aims to revise foreign exchange laws, encourage external trade and payments, and develop an orderly foreign exchange market in India through proper implementation and supervision.
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CH 8 - RELATIONSHIPS AMONG INFLATION. INTEREST RATES. AND EXCHANGE RATES.pptx
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Factor Affecting exchange rate and Theories of exchange rate
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Factors Influencing Exchange Rate: An Empirical Evidence from Bangladesh
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PPP, IFE and IRP
- 1. Does IRP, PPP and IFE exist in Pakistan V/S US exchange rates Muhammad Bilal SP16-BBA-008 Muhammad Irfan SP16-BBA023
- 2. What is PPP? Purchasing power theory is a theory which attempts to adjust the effect of inflation with exchange rate. Example: When inflation raise in any country the demand of foreign currency for that particular country increase as a result exchange rate increases.
- 3. Types of PPP • Absolute form of PPP Absolute form of PPP says that without international barriers customers can shift there demand • Relative form of PPP Relative form of PPP says that transportation cost, tariffs and transaction cost exist
- 4. Derivation of purchasing power parity
- 5. Does PPP exist in Pakistan and US exchange rates PPP does not exist in Pakistan and US exchange rates because of the following reasons • Goods are not perfect substitute for each others in both countries • Not only inflation effect exchange rate but other factors also exist such as interest rate, expectations, government control and income level of the people
- 6. What is IFE? IFE describe the effect of change in interest rate rather then the inflation rates usually interest rates and inflation are highly correlated when interest rate increase in a country it is assumed to increase in inflation. It describe the effect of nominal interest rate and real interest rate with respect to exchange rate A currency with higher nominal interest is expected to deprecate against the currency with lower nominal interest.
- 8. What is IRP? Interest rate parity is a theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. When interest rate increase in a country the amount of forward contract for the currency of that particular currency in increased as result investors cannot take benefit