25300 Lecture Notes - Lecture 11: Country Risk, Capital Market, Interest Rate
Document Summary
*the price of one country"s currency expressed in terms of another country"s currency (cid:523)aud(cid:883) = usd(cid:882). (cid:891)(cid:884)5(cid:890)(cid:524) *it is not a capital market: understand foreign exchange terminology. Speculation & arbitrage: speculators try to profit from changes in exchange rates: the different parity relationships in fx (ppp, interest rate) Absolute ppp = product has same price regardless of where its sold. If not the case, removed by arbitrage (buying low, selling high) Relative ppp = tells us what determines the change in exchange rate over time (difference in inflation rates) If exchange rate was 0. 66 = no profit opp: interest rate parity. Exchange rate should appreciate or devalue as to equalise effective realised interest rates between countries. Expectation = local currencies fall and offset difference in interest rates. * 000 in interest at the end of the year (pay. 000 = 000 profit: foreign exchange rate risks. *arises from unexpected movements in the exchange rates.
