Kirt C. Butler国际金融课件 ch05.pptVIP

Chapter 5The International Parity Conditions Though this be madness, yet there is method in it. William Shakespeare Prices Rates of change The law of one price Equivalent assets sell for the same price (also called purchasing power parity, or PPP) Seldom holds for nontraded assets Can’t compare assets that vary in quality May not hold precisely when there are market frictions An example: The world price of gold Suppose P￡ = ￡250/oz in London P€ = €400/oz in Berlin The law of one price requires: Pt￡ = Pt€ St￡/€ T ￡250/oz = (€400/oz) (￡0.6250/€) or 1/(￡0.6250/€) = €1.6000/￡ If this relation does not hold, then there is an opportunity to lock in a riskless arbitrage profit. An example with transactions costs Gold dealer A Gold dealer B Cross exchange rate equilibrium A cross exchange rate table Cross exchange rates and triangular arbitrage Cross exchange rates and triangular arbitrage SRbl/$ S$/￥ S￥/Rbl = 1.01 1 T Currencies in the denominators are too high relative to the numerators, so sell dollars and buy rubles sell yen and buy dollars sell rubles and buy yen An example of triangular arbitrage International parity conditionsthat span both currencies and time Interest rate parity Less reliable linkages Ftd/f / S0d/f= [(1+id)/(1+if)]t = E[Std/f] / S0d/f = [(1+pd)/(1+pf)]t where S0d/f = today’s spot exchange rate E[Std/f] = expected future spot rate Ftd/f = forward rate for time t exchange i = a country’s nominal interest rate p = a country’s inflation rate Interest rate parity Ftd/f/S0d/f = [(1+id)/(1+if)]t Forward premiums and discounts are entirely determined by interest rate differentials. This is a parity condition that you can trust. Interest rate parity:Which way do you go? If Ftd/f/S0d/f [(1+id)/(1+if)]t then so... Ftd/f must fall Sell f at Ftd/f S0d/f must rise Buy f at S0d/f id must rise Borrow at id if must fall Lend at if In