Compare the Most Recent Ppp Exchange Rates for the Pound, Yen and Euro with Their Nominal Exchanges Rates

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Q1) Using data from the OECD (see Blackboard), compare the most recent PPP exchange rates for the pound, yen and euro with their nominal exchanges rates. What differences do you observe? What accounts for those differences? PPP exchange rates are the converted currency rates that equalize the purchasing power of different currencies for a given basket of goods by eliminating the differences in price levels between countries. The following is the comparison of the PPP exchange rates for pound, yen and euro between their nominal exchange rates in 2009, shows that PPP exchange rate of Japan was lower than the nominal exchange rates, whereas United Kingdom and Euro area had higher PPP exchange rates than their nominal exchange rates. There…show more content…
Aside from these factors, future issuers may also foresee the future rates differently and the divergency of operation cost between future issuers could be relatively significant. Q4) Summarise the findings of the attached academic paper by Jorda and Taylor. The paper by Jorda and Taylor elaborated that several factors which could affect the result of estimation of “equilibrium” values for carry trade. The uncertainty of exchange rate, the size of the interest rate and the inflation gap between currency are most likely the main factors influencing the results. Arbitrageurs could make profit when the market is inefficient by selling a currency with a relatively low interest reate and uses the funds to purchase a different currency yielding a higher interest rate. This strategy is called carry trade. Such opportunity for riskless profit arises only high-interest currency does not exactly offset by the fall in target currency. However, carry trades are tend to be infrequent as profits are volatile and huge losses may incur when the high-interest currency appreciates drastically relative to the target currency. For example, in late 2008, the yen rose by 60% against high-yielding Australian dollar in just 2 months made carry traders a huge loss by paying back muc more expensive yen-denominated debt. Losses from carry trade are apparently attributed to the inaccurate expectation of exchange rate and inflation rate

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