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This 5 page Study Guide was uploaded by Yao Ji on Thursday December 11, 2014. The Study Guide belongs to 2201 at a university taught by Wang in Fall2014. Since its upload, it has received 179 views.
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Date Created: 12/11/14
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Forward rate is a predicator of future spot rate When the forward premium on dollar is zero the current forward price of dollarcurrent spot price of dollar When the uncovered interest parity holds it means that a currency is expected to appreciate by as much as its interest rate is lower than the interest rate in the other country When the covered interest parity holds the forward equals the interest rate differential When the current pound forward rate is below the current spot rate the pound is at a forward discount Using the actual market exchange rate and comparable short term interest rates for the major currencies we see that covered interest parity usually holds well The purchasing power parity illustrate the relationship between the national price levels and exchange rates in the long run Expectations are stabilizing if they are based on the belief that exchange rates eventually return to the values consistent with basic economic conditions Domestic interest rate increase foreign interest rate and expected spot rate remain constant the return comparison shifts in favor of domestic currency The law of one price is NOT based on the purchasing power parity theory Exchange rate are much more volatile in the short run than in the long run Models designed to predict short run exchange rate uctuations are more Inaccurate than models designed to predict long run trends Real exchange rate can be used as an indicator of a country s intemational price competitiveness Tbills Ius4 IUk7 spot exchange rate2 forward exchange ratel98 e2 f198 semiannual Ius2 Iuk35 FP198223601802 a CDFIukIusl semi 05 b expected future spot rate is 204 Eex204 EUDEexeeIukIus35 c CD0 F3 f2223 f197 d If the expected uncovered interest rate is POSITIVE the expected overall return favors uncovered investing in the foreign currency EUD bigger than 0 invest in UK Iuk4 spot rate2 forward ratel96 CD0 Ius f eeIusIuk Ius2 36 If dollar is at F premium then pound is at F discount
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