International parity conditions approach Do international parity conditions hold in the real world? PPP does not hold precisely in the real world: --Arbitrage only works for tradable goods. --Transportation costs. --Barriers to trade. 袋 PPP tends not to be accurate in predicting short-term changes in exchange rates,but gets empirical support at longer horizons
International parity conditions approach Do international parity conditions hold in the real world? PPP does not hold precisely in the real world: --Arbitrage only works for tradable goods. --Transportation costs. --Barriers to trade. PPP tends not to be accurate in predicting short-term changes in exchange rates, but gets empirical support at longer horizons
International parity conditions approach Do international parity conditions hold in the real world? Empirical tests indicate that the international Fisher effect performs poorly in predicting short-term changes in exchange rates. At longer horizons it appears that currencies with high interest rates tend to depreciate as predicted by the international Fisher effect
International parity conditions approach Do international parity conditions hold in the real world? Empirical tests indicate that the international Fisher effect performs poorly in predicting short-term changes in exchange rates. At longer horizons it appears that currencies with high interest rates tend to depreciate as predicted by the international Fisher effect
International parity conditions approach Do international parity conditions hold in the real world? Empirical evidence suggests that the forward rate is a biased predictor of the future exchange rate. We do not observe large and persistent 分 deviations from the interest rate parity Covered interest arbitrage is rare in practice
International parity conditions approach Do international parity conditions hold in the real world? Empirical evidence suggests that the forward rate is a biased predictor of the future exchange rate. We do not observe large and persistent deviations from the interest rate parity. Covered interest arbitrage is rare in practice
International parity conditions approach Covered vs uncovered interest arbitrage An investor observes the following data: --Spot rate between YEN and USD:S(YEN/USD)=118.611 --180 days forward rate between YEN and USD: F(YEN/USD)=117.800 --180 days US dollar interest rate (per annum): iUSD=4.8% --180 days Japanese yen interest rate(%per annum): iYEN 3.4%
International parity conditions approach Covered vs uncovered interest arbitrage An investor observes the following data: --Spot rate between YEN and USD: S(YEN/USD) = 118.611 --180 days forward rate between YEN and USD: F(YEN/USD) = 117.800 --180 days US dollar interest rate (% per annum): iUSD = 4.8% --180 days Japanese yen interest rate (% per annum): iYEN = 3.4%
International parity conditions approach Covered vs uncovered interest arbitrage The investor can always borrow 50,000 US dollars or the equivalent in any other currency. The investor believes that the yen is going to depreciate against the US dollar during the next 180 days.His expected exchange rate is S(YEN/USD)=125. 我 What is the covered interest arbitrage potential? 华 What is the uncovered interest arbitrage potential? What is the uncovered interest arbitrage profit if the spot rate turns out to be S(YEN/USD)=116 after 180 days? Assume that the US interest rate increases to 6%.Can the investor make a covered interest arbitrage profit?
International parity conditions approach Covered vs uncovered interest arbitrage The investor can always borrow 50,000 US dollars or the equivalent in any other currency. The investor believes that the yen is going to depreciate against the US dollar during the next 180 days. His expected exchange rate is S(YEN/USD) = 125. What is the covered interest arbitrage potential? What is the uncovered interest arbitrage potential? What is the uncovered interest arbitrage profit if the spot rate turns out to be S(YEN/USD) = 116 after 180 days? Assume that the US interest rate increases to 6%. Can the investor make a covered interest arbitrage profit?