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This book presents an extensive survey of the theory and empirics of international parity conditions which are critical to our understanding of the linkages between world markets and the movement of interest and exchange rates across countries. The book falls into three parts dealing with the theory, methods of econometric testing and existing empirical evidence. Although it is intended to provide a consensus view on the subject, the authors also make some controversial propositions, particularly on the purchasing power parity conditions.
This note reviews the four central parity conditions that underlie most theories regarding the relationship between exchange rates, inflation, and interest rates. The concepts are illustrated through a unified example exploring the relation between the US dollar and the Norwegian krone. The note presents both an intuitive understanding of the relations as well as precise mathematical formulas frequently employed in analysis.ExcerptUVA-F-1572Rev. Oct. 18, 2019Parity Conditions in International MarketsGlobal firms are not the only ones affected by global markets. Even firms with only domestic operations and financing can be dramatically affected by changes in the international landscape associated with, among other things, exchange rate changes, global price changes, and capital market fluctuations.This note presents an overview of the theoretical frameworks that underlie most thinking and discussion about the relations between exchange rates, interest rates, and inflation. All the relations described in this note are based on one premise--that markets will move in response to profit-seeking activities in such a manner as to reach a point where profits are eliminated. When markets are at this zero-profit point and there are no incentives to act, the markets are in equilibrium and deemed to be in "parity." Hence, these basic relations are called parity conditions.Throughout this note, we will consider a single pair of currencies, the US dollar (USD) and the Norwegian krone (NOK). The discussion in this note assumes a familiarity with basic currency terminology and markets; however, a review of these topics is provided in the Appendix. All exchange rates express the relation between two currencies, and both interest and inflation rates are associated with specific currencies. We will introduce notation as concepts are covered. At this point, however, we note that every exchange rate states the value of one currency (we will refer to this as the quoted currency) in terms of another (we will refer to this as the basis currency). We will subscript interest and inflation rates with the letters q and b to indicate whether the rate is for the quoted or basis currencies, respectively.
This note develops the foundations of the ideas underlying much of the theory and practice of International Finance, notably the basic 'parity conditions' linking exchange rates, interest rates, and inflation rates. Specifically, the note develops the ideas of purchasing power parity, speculative efficiency, uncovered interest parity, and the international Fisher effect, and the links among these from a managerial perspective. It includes a brief discussion of the factors driving exchange rate changes in the medium term, and of the three types of exchange rate exposure that cross-border firms face, namely translation exposure, transaction exposure, and economic exposure.
International transactions among nations and multinational corporations are important and growing due to the openness of economies all over the world. In this follow-up title to Exchange Rates and International Financial Economics, Kallianiotis examines the role of the exchange rate and trade policy in improving the trade account. He discusses the international parity conditions extensively, together with the most popular theory in international finance, the interest rate parity (IRP) theory. International Financial Transactions and Exchange Rates describes these theories and gives practical solutions for multinational businesses, individuals, and nations. The increasing internationalization of businesses, openness of economies, integration of nations, change in the exchange rate system, and lastly, the deregulation of the financial market and institutions around the world have made the study of international finance necessary for all business students and professionals.
Global Corporate Finance: A Focused Approach introduces students to basic principles of international corporate finance. The book stresses practical applications in a user-friendly format and is hence suitable for both undergraduate and graduate level courses in international finance. A self-contained book combining theory and applications, the text can be used in any part of the world as it takes a global viewpoint. Students will be exposed to key tools and techniques of global corporate finance without a complex treatment of theoretical financial concepts.
For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
Deep coverage and rigorous examination of international corporate finance Multinational Finance offers an advanced exploration of international corporate finance concepts and operations. Despite its status as one of the most rigorous texts on the topic, this book remains accessible and readable without sacrificing depth of coverage. Sidebars, key terms, essays, conceptual questions, and problems with solutions help aid in the learning process, while suggested readings and PowerPoint handouts reinforce the material and offer avenues for further exploration. This new sixth edition includes Excel templates that allow students to use real-world tools in a learning environment, and the modular structure facilitates course customization to individual objectives, interests, and preparatory level. The emphasis is on the basics of financial management, but coverage includes unique chapters on treasury management, asset pricing, hedging, options, and portfolio management in addition to traditional finance topics. International finance is a diverse field with myriad specialties and a vast array of possible interests. This book allows students to view the field through the lens of a financial manager with investment or financial options in more than one country to give them a practical feel for real-world application. Understand the nature and operations of international corporate finance Evaluate opportunities, costs, and risks of multinational operations See beyond the numbers and terminology to the general principles at work Learn the markets, currencies, taxation, capital structure, governance, and more Comprehensive, adaptable, and rigorously focused, this book gives students a solid foundation in international corporate finance, as well as a sound understanding of the tools and mechanics of the field. Designed for MBA and advanced undergraduate courses, Multinational Finance provides the deep coverage so essential to a solid education in finance.
This book extends recent theories of incomplete markets to investigate empirically the appropriate balance between the market and the state in the trade relations between developed and developing countries. The conclusion is that in an ideal world government intervention in foreign exchange and trade is necessary in developing countries in the early stages and inevitably decreases as development occurs. Rationing of foreign exchange prevents a 'soft currency distortion' that commonly afflicts developing countries and can turn comparative advantage trade into competitive devaluation trade, with severe losses of income and welfare. Yotopoulos finds that the level of underdevelopment narrowly circumscribes and conditions the extent to which free-market, free-trade, laissez-faire can be beneficial, contrary to the mainstream policy paradigm as currently applied. The analysis and tests draw on empirical research from seventy countries and four extended country studies to confirm the usefulness and validity of the theoretical framework.
The purpose of this text is to analyze the key financial markets and instruments that facilitate trade and investment activity on a global scale. It spans two key areas: First-the economic determinants of prices, price changes and price relationships in the major financial markets; Second-the policy issues that result from private enterprises and public policymakers.