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发表于 2012-3-28 14:15
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Justine Kravitz is the Chief Executive Officer for Fantatradcom, a global designer and manufacturer of consumer luxury goods. Under Kravitz’ direction, Fantatradcom has grown from a modest operation in the Euro zone to a truly global organization, with manufacturing facilities in 32 countries and sales operations in more than 100.
The firm’s global expansion has caused the management of foreign exchange and interest rate risk to become a paramount concern to certain outside investors. In response, the Chief Financial Officer, Leonardo DiLorenzo, has established a large and active foreign exchange trading and hedging operation under the direction of Omar Nasser.
Kravitz is uncertain about the need for the foreign exchange hedging operations. She points out, “The asset market approach indicates that even though an unexpected increase in money supply will cause the domestic currency to depreciate in the short run, it should return to purchasing power parity equilibrium (PPP) in the long run.” Nasser disagrees, arguing, “Absolute purchasing power parity is of little use in determining exchange rates.”
Nasser provides the example of the United States and Switzerland to support his argument in favor of maintaining the foreign currency hedging operations:
International Economic Statistics
US$/CHF spot rate | 1/1 |
1-year U.S. interest rate | 6% |
Expected annual U.S. inflation | 3% |
1-year Swiss interest rate | 4% |
Expected annual Swiss inflation | 2% |
Nasser argues that international parity relations suggest that the interest rates in the U.S. and Switzerland are in disequilibrium, saying, “International parity relations would put U.S. rates at approximately 4.9%, given the relative inflation rates and Swiss interest rates.” DiLorenzo agrees that there is currently a disequilibrium between the U.S. and Switzerland and suggests, “The high interest rates in the U.S. indicate that in the 1-year forward market, the U.S. dollar should trade at 1.02 CHF because of covered interest rate parity.”
DiLorenzo adds an additional point about expected exchange rate movements. He reminds Kravitz, “Purchasing power parity and uncovered interest parity both predict that the U.S. should experience an appreciation of its currency relative to Switzerland because of its higher interest and inflation rates.” He argues that such knowledge should be used to manage Fantatradcom’s currency exposures.
Kravitz remains unconvinced. She reminds DiLorenzo, “The theory of the traditional balance of payments approach to determining exchange rates suggests that exchange rate adjustments are required to restore balance of payments equilibrium. Since even small changes in the current account flows drive dramatic changes in the foreign currency markets,” she points out, “the balance of payments approach is the most useful means of explaining how exchange rates are determined in practice.”Which of the following is most likely to be considered an implication of the combined international parity relationships? A)
| Investors interested in real returns face exchange rate risk. |
| B)
| Investors will earn the same expected real return in their own currency on any investment denominated in a foreign currency. |
| C)
| The real risk-free return differs across countries. |
|
The combined parity relationships imply that exchange rate risk is inflation risk and expected return on risk-free securities should be the same in all countries. Thus, investors interested in real returns face no exchange rate risk, investing in countries with high nominal interest rates will not generate excess returns, and the real risk-free return is the same across countries. The only true statement is that investors earn the same expected real return in their own currency on any investment in a foreign currency.
Which most accurately describes the statements made by Nasser and DiLorenzo about the current disequilibrium relationship between the US and Switzerland?
Both are incorrect. Nasser is incorrect because international parity relations suggest that the U.S. rate should be slightly higher than 5.0%:
(1 + X) / 1.04 = (1.03) / (1.02)
1 + X = (1.04)(1.03) / (1.02)
1 + X = 1.0502
DiLorenzo is incorrect because covered interest rate parity suggests that the US$ should equal the spot rate times the ratio of the interest rates, or (1.00) × (1.06 / 1.04) = 1.02 US$/CHF, not 1.02 CHF/US$.
Kravitz’ statements describing the theory behind the balance of payments approach to determining foreign exchange rates and assessing its usefulness in practice are best described as: A)
| correct in description of the theory but incorrect in assessment of its usefulness in practice. |
| B)
| correct in both theory and practice. |
| C)
| incorrect in both theory and practice. |
|
Kravitz’ description of the theory is correct. The traditional approach to foreign exchange rate determination indicates that exchange rate adjustments are required to restore balance of payments equilibrium. Her assessment of its usefulness in practice is incorrect because the small changes in current account flows cannot explain the volatility in exchange rates.
Empirical evidence suggests that relative purchasing power parity (PPP) tends to hold in the:
PPP does not tend to hold in the short run for a variety of reasons, including differences in goods, transaction and transportation costs, short-term immobility in the factors of production, and constraints on arbitrage in physical goods. However, currencies do tend to converge to PPP over the long run.
DiLorenzo’s statement about the implications of both purchasing power parity (PPP) and uncovered interest parity for expected exchange rate movements in the US$ is best described as: A)
| incorrect about PPP but correct about uncovered interest parity. |
| B)
| incorrect about both PPP and uncovered interest parity. |
| C)
| correct about both PPP and uncovered interest parity. |
|
DiLorenzo’s statement about PPP and uncovered interest parity is incorrect in both parts. Purchasing power parity predicts that countries with higher relative expected inflation should experience a depreciation of their currencies. Uncovered interest parity predicts that countries with higher relative interest rates will experience a depreciation of their currencies. Both theories indicate the US$ should depreciate, not appreciate, relative to the Swiss franc.
Are Kravitz and Nasser correct in their statements regarding the currency fluctuations and purchasing power parity (PPP)?
Although the statements appear contradictory, both are correct. Absolute purchasing power parity is of little use in determining exchange rates because goods and services are rarely identical between two countries. However, exchange rates do tend to revert to purchasing power parity equilibrium levels in the long run. |
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