An Introduction to Exchange Rate Determination and arbitrage(国际金融-香港大学,WONG Ka Fu).pptVIP

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2017-06-14 发布于江西
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An Introduction to Exchange Rate Determination and arbitrage(国际金融-香港大学,WONG Ka Fu).ppt

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An Introduction to Exchange Rate Determination and arbitrage(国际金融-香港大学,WONG Ka Fu)

An Introduction to Exchange Rate Determination How would you explain the movement of Japanese Yen? (source: merce.ubc.ca/xr/plot.html) How would you explain the movement of Japanese Yen? (source: merce.ubc.ca/xr/plot.html) How would you explain the movement of European Euros? (source: merce.ubc.ca/xr/plot.html) How would you explain the movement of European Euros? (source: merce.ubc.ca/xr/plot.html) How do we explain the movement of foreign exchange? Arbitrage Purchasing Power Parity Hong Kong’s Currency Board mechanism Other arbitrage opportunities across space International phone call: HK direct to Beijing (Price= P1) HK to Canton province, from where the call is redirected to Beijing (Price= P2) Arbitrage opportunities exists when P1? P2, or P1-P2 ? 0. Arbitrage activities (though illegal) will drive P1-P2 towards zero. Arbitrage opportunities across space Other arbitrage opportunities across space Buying or selling Japanese Yen HKD direct to JPY (Price= P1) HKD to Swedish Krona and Swedish Krona to Yen (Price= P2) Arbitrage opportunities exists when P1? P2, or P1-P2 ? 0. Arbitrage activities will drive P1-P2 towards zero. * * WONG Ka Fu 10th January 2000 And Arbitrage UC MacDonald NA MacDonald Prices of Big Mac 7.80 15.60 Case 1 What would you do? What would you do? Choose the cheaper MacDonald for lunch. Buy Big Mac from UC and sell at NA. Effect of our action Our action: Choose the cheaper MacDonald for lunch. Buy Big Mac from UC and sell at NA. More supply of Big Mac, less demand for Big Mac At NA Price of Big Mac falls. Greater demand for Big Mac, less supply for Big Mac At UC Price of Big Mac increases. UC MacDonald NA MacDonald What would you do in the absence of transaction costs? PUC PNA Case 2 PUC PNA Case 3 Punch line: Arbitrage activities continue until prices equalize. Arbitrage is a strong driving force to equalize prices. HK MacDonald US MacDonald Prices of Big Mac (assume 1USD = 7.8 HKD) HKD 7.80 USD 1 Case 4 HKD 15.60 USD 1 Ca