CHAPTER4PPT.pptVIP

CHAPTER 4 PARITY CONDITIONS AND CURRENCY FORECASTING PART I. ARBITRAGE AND THE LAW OF ONE PRICE I. THE LAW OF ONE PRICE A. Law states: Identical goods sell for the same price worldwide. ARBITRAGE AND THE LAW OF ONE PRICE B. Theoretical basis: If the price after exchange-rate adjustment were not equal, arbitrage in the goods worldwide ensures eventually it will. ARBITRAGE AND THE LAW OF ONE PRICE C. Five Parity Conditions Result From These Arbitrage Activities 1. Purchasing Power Parity (PPP) 2. The Fisher Effect (FE) 3. The International Fisher Effect (IFE) 4