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Determination
Issues in Global Trade &
Finance
Prof. Bryson
Part I
Factors Determining Rates
How It Works
Determining Factors in
Foreign Exchange Prices
Determining Factors in
Foreign Exchange Prices
Determining Factors in
Foreign Exchange Prices
policies,
trade data or performance,
international political tensions and situations.
Determining Factors in
Foreign Exchange Prices
Determining Factors in
Foreign Exchange Prices
P$
Part II.
Short-term Rates
and Investment Options
Short-term Investment
Options
SHORT-TERM INVESTMENT
OPTIONS
Invest at .08 for 1 year in the U.K.
A. Buy s in spot market at 1/ rs.
B. Invest at (1 + .08)/ rs
C. At the time of the
investment, hedge the investment by
selling contracted earnings in the
forward market at rf .
2.
SHORT-TERM INVESTMENT
OPTIONS
When we hedge the investment by
selling contracted earnings in the
forward market,
the yield is ( 1 + iuk ) ( rf / rs )
$1,080,000 (0.61/0.63) =
1,080,000 (.97) = $1,045,714
Where we have
$1,080,000 (0.61/0.63) = 1,080,000 (.97) =
$1,045,714,
if the future rate ($1.65) is greater than the
spot rate ($1.63), one expects $ depreciation.
Invest in UK
Invest in U.S.
Borrow in UK
Borrow or
sell assets
in U.S.
Present
US
UK
Current $
currencies
Current
Future
Part III.
Exchange Rates in the Long
Run
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?
Hopper on What
Determines the Exchange
Rate?