國際經(jīng)濟學(xué)國際貿(mào)易分冊,8e英文教師手冊習(xí)題答案ichap

1、The Foreign Exchange MarketChapter 20:Copyright 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Learning ObjectivesSummarize the fundamental underpinnings of the foreign exchange market.Explain the distinctions among various measures of the exchange rate.Differentiate a

2、mong the roles of hedging, arbitrage, and speculation in foreign exchange markets.Describe the links between the current spot rate and contracts to buy or sell foreign exchange in the future. The Foreign Exchange Rate and the Market for Foreign ExchangeForeign exchange rate: the price of one currenc

3、y in terms of another.e.g., US$/ or /US$The foreign exchange rate is determined by the interaction of demand for and supply of foreign exchange.The foreign exchange market is the worldwide network of markets and institutions that exchange currencies. The Market for Foreign Exchange: DemandForeign ex

4、change is demanded by thosewishing to buy goods and services from or send gifts or payments to another country.wishing to purchase financial assets in another country.wishing to profit from exchange rate changes (speculation).wishing to minimize risk from exchange rate changes (hedging). The Market

5、for Foreign Exchange: SupplyForeign exchange is supplied by thoseselling goods and services to or receiving gifts or payments from another country.in other countries who wish to purchase financial assets in the home country.wishing to profit from exchange rate changes (speculation).wishing to minimi

6、ze risk from exchange rate changes (hedging).The Market for Foreign ExchangeDEuros ()$/SQeqeeqInitially, Qeq euros are traded, and the equilibrium price is eeq.The Market for Foreign ExchangeDEuros ()$/SQeqeeqAn increase in U.S. demand for euros causes an appreciation of the euro.DeeqQeqThe Market f

7、or Foreign ExchangeDEuros ()$/SQeqeeqAn increase in the supply of euros causes a depreciation of the euro.SeeqQeq The Market for Foreign Exchange: SupplyThe total supply and demand for foreign exchange includes two components.One is related to current account transaction.The other is related to fina

8、ncial flows, including speculation and hedging.The Market for Foreign ExchangeDG&SEuros ()$/SG&SThe total equilibrium exchange rate will only be the same as the one for G&S if the current account is exactly in balance.DTotaleeqQeqSTotal The Spot MarketThe spot market is the daily or current market f

9、or foreign exchange.The main participants are large commercial banks trading with each other in the interbank market.There are many foreign exchange markets, but they all tend to generate the same exchange rate regardless of location.This is the result of arbitrage. ArbitrageArbitrage occurs when in

10、dividuals see an opportunity to buy something at a low price in one market, then sell it for a higher price in a second market.This causes prices in all markets to move towards each other.Arbitrage causes currency prices to be similar across markets, and makes cross rates between currencies consiste

11、nt. Different Measures of the Spot RateHow can we measure a countrys overall exchange rate (not just a bilateral rate)?Nominal effective exchange rate (NEER)Real exchange rate (RER)Real effective exchange rate (REER)Purchasing power parity (absolute and relative) Different Measures of the Spot Rate:

12、 NEERThe nominal effective exchange rate weights the exchange rates of each of a countrys trading partners by the volume of trade with each.NEER is a weighted average of a currencys exchange rate against a bundle of other currencies. Different Measures of the Spot Rate: RERHowever, prices in the two

13、 countries may not be constant.Suppose the dollar appreciates against the euro by 10%, but at the same time U.S. prices rose by more than European prices.The decline in U.S. competitiveness is more than 10%.RER=e/$(price indexUS/price indexEur). Different Measures of the Spot Rate: REERThe real effe

14、ctive exchange rate weights the real exchange rates of each of a countrys trading partners by the volume of trade with each.REER is a weighted average of a currencys real exchange rate against a bundle of other currencies. Absolute Purchasing Power ParityIn principle, a commodity should have the sam

15、e price worldwide when measured in a common currency, due to arbitrage.PPPabs = price levelUS/price levelEurIf cotton costs $0.5 per pound in the U.S., and 0.35 per pound in Europe, the exchange rate should be $1.43/.However, transportation costs and other differences means absolute PPP doesnt gener

16、ally occur. Relative Purchasing Power ParityRelative PPP takes into account differences in price indexesPPPrel$/ = (e $/)x(PIUS/PIEur).Relative PPP relates the change in the exchange rate to changes in the two countries price levels. The Forward MarketMost exchanges of currencies takes place two bus

17、iness days after the contract has been completed.In general, forward exchange rates can be for any period of time into the future.Suppose a U.S. company agrees to buy 5 trucks from a French company at a price of 50,000 each, with delivery in 6 months, the equivalent of $70,000 at todays spot exchang

18、e rate of $1.4/. The Forward MarketWhat if the euro appreciates to $1.6/?Now the price in dollars has risen to $80,000.There are ways to hedge against this potential risk.The buyer and seller can agree to make the sale at todays forward exchange rate.The buyer can purchase a foreign currency option

19、this gives the buyer the right to a specific exchange rate at a specific time in the future. The Link Between the Foreign Exchange and the Financial MarketsThe decision to invest internationally depends on the expected rate of return on the international asset relative to domestic alternatives.Speci

20、fically, investors considerThe domestic interest rate or expected rate of return.The foreign interest rate or expected rate of return.Any expected changes in exchange rates. The Link Between the Foreign Exchange and the Financial MarketsAn investor would be indifferent between a $1 domestic or forei

21、gn investment if her expected return is the same after accounting for expected changes in the spot rate.Let iNY = 90-day interest rate in New York.Let iParis = 90-day interest rate in Paris.Let E(e) = the expected spot rate in 90 days. The Link Between the Foreign Exchange and the Financial MarketsA

22、n investor would be indifferent if$1(1+iNY) =($1)/(e)x(1+iParis)E(e), or (1+iNY)/(1+iParis)=E(e)/e.This can be approximated as(iNY iParis) xa, where xa is the expected appreciation of the foreign currency. The Link Between the Foreign Exchange and the Financial MarketsThis is called uncovered intere

23、st parity (UIP).If (iNY iParis) xa, investments in the U.S. will be more attractive to investors and investment funds would flow into the U.S.If (iNY iParis) p transactions costs?Investment funds should move from Paris to New York, decreasing the supply of loanable funds in Paris.This should put upw

24、ard pressure on interest rates in Paris.International Financial and Exchange Rate AdjustmentsiParisSDiPSiPParis money market International Financial and Exchange Rate AdjustmentsThe conversion of euros into dollars in the spot market increases the supply of euros, thereby putting downward pressure on the euro spot rate (that is, causing the dollar to appreciate).I