金融英语 9Foreign Exchange Rates [武汉理工].ppt

International Parity Conditions Exchange rates are influenced by interest rates and inflation rates, and together, they influence markets for exchange rates in the future, known as forward rates. The linkages among these variables are called Parity Conditions. Parity Conditions are key relationships used to predict movements in exchange rates. Interest Rate Parity If interest rates in Europe were higher than they were in the US, no one would invest in the US so long as they thought the Euro and dollar would be stable. The equilibrium condition is known as interest rate parity. Let e0 be the current exchange rate price for a foreign currency. An approximation of this parity condition is given as: (f90 – e0) / e0 = [rUS - rEMU] Interest Rate Parity Suppose interest rates in the Europe are 1% for 90 days, and only .5% in the US. We would expect the value of the Euro must fall to make investing in both countries end up with the same return. Using the formula above, the left side is the expected forward discount. (f90 – e0) / e0 = -.005, or a half percent expected drop in the Euro over the next 90 days (3 months). The Fischer Effect Domestic interest rates, r, are the sum of a real return, i, and an expected change in the price level, Ex(%DCPI), which is the inflation rate. r = i + Ex(%DCPI) It is often presumed that real returns become equal world wide. In that case, the Fisher Effect can be used to examine differences in two country’s interest rates. For the example of the US and the EMU, we have: [rUS - rEMU ] = Ex(%DCPI)US - Ex(%DCPI)EMU This equation is known as the international fisher effect. International Fischer Effect Since differences in inflation rates tend to lead to differences in interest rates, we can use differences in interests rates predict changes in exchange rates. [et – e0]/e0 = [rUS - rEMU] Suppose that the left side of the above equation is the percentage change in the value of the Euro measured in dollars. When