Examples Of Parity Theory

B the permanent movement of funds from one currency to another in the hopes of profiting from long. term investment in a particular country.

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

2) Interest rate parity (how exchange rate is determined by the flows of capital) and

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

Because passive investments create the least risk of foreign control, they are the least regulated of foreign investments.

Businesses, institutions, and individual investors may not be risk tolerate and may seek to place their investments in other countries with a managed exchange rate with less volatility. By the definition of flexible exchange rate, there are little or no government controls or use of active government intervention.

With regards to the law of one price which depicted some relations with arbitrage, assets having the same flow of cash should trade for the same price. In the case of different prices, there is the possibility to earn almost riskless profit. Financial derivatives prices are grounded on a certain model, and in the case of mismatch, there is the possibility to carry out the cash-and-carry arbitrage in trading both the derivative and underlying asset in such a specific way that results to almost a riskless profit. Záškodný (2007) noted that, in the event of mispriced assets, it does not essentially imply that there is also a riskless profit to be earned. This he attributed this to the fact that prices of financial instruments often move in so-called no-arbitrage zones. The said zones are price intervals in which the prices are not necessarily in agreement with the model, but then again because of operation costs and other obstacles, it is not possible to arbitrage the prices to counterpart the theoretical value. The more advanced the operation costs, the larger is the no arbitrage zone. Therefore the strategies of arbitrage can only be executed by the movement of price away from the zone, either by the means of upper bound or lower bound. It is also note that as a result of globalization and competition, arbitrage is only profitable when dealing with huge volumes of business transactions. Nevertheless this is said to result in increases in risk, because at a single point of failure a lot of losses would occur. Demonstratively, if Company ABC’s stock trades at $4.00 per share on the Ghana stock exchange market (GSE) and the same of $4.05 on the Nigeria stock exchange market (NSE), an arbitrageur would purchase the stock for $4 on the Ghana stock exchange and sell it at the value of $5.05 on the Nigeria stock exchange market which yields him/her the

At the beginning of his article, he writes about the global economy in the midst of a “second banking crisis” (Skidelsky 2012, p. 7). He believes that in order for the economy to become balanced there needs to be an overarching power that is in control of the global economy. Such as the Keynesian theory

INTERNATIONAL FINANCE ASSIGNMENT 2 _ Answer Key PROBLEM I (30 points) Suppose the quarterly (90-day) interest rate in the US is 2.5% and it is 4% in Canada. If the $/CD spot exchange rate is $0.80/CD and the 90-day forward exchange rate between US and Canadian dollars is $0.79/CD , does the interest rate parity (IRP) hold? Why or why not? If it does not hold, what is the direction of the capital flow?

This paper will discuss the implications of the Fed’s monetary policy on the globe because of the gold standard, the problems caused by a decentralized Fed, and the Fed’s failure of a lender of last

Official interest rate changes will also influence asset prices. For example, bond prices are inversely influenced by long-term interest rates. Finally, the official interest rate will also affect the exchange rate which the paper defines as “the relative price of domestic and foreign money” (George et. al, n.d.). When the official interest rate rises, domestic currency (the GBP) will see appreciation making investors want to invest in pounds. Another key point is that with changes in the exchange rate, there will also be a change in the value of domestic and foreign exports and imports. Finally, a change in the official interest rate can also affect people’s expectations and confidence in the economy. For example, some may believe that an increase in interest rates is a signal that the MPC thinks that the economy is expanding thus making further growth likely or, a contradictory interpretation may be that the MPC thinks that the MPC may need to slow growth in order to control inflation (George, n.d).

Consequences regarding the international businesses and the flow of trade and investment among the three countries are given below as benefits and drawbacks of holding fixed exchange rate system-

But, even though the possibility of winning exists, the company is exposed to a greater risk if it does not hedge. Moreover, the policy of the company is to ensure against the risk, not to speculate on the foreign exchange market.

the one-year forward rate of NZ$ is $.50. At the end of the year, the spot rate of NZ$ is $.48.

As the economy becomes more and more integrated, the trade barriers between individual countries are gradually removed. People now have more options in terms of goods, services, and of course investments, meaning capital flows are more mobile nowadays. However, deregulation of the capital raises controversy and concerns about whether if increasing capital mobility is going to bring prosperity, not only to the world economy in general, but to each country individually. According to Helleiner (1994), high capital mobility is claimed to be one of the causes to the 09 financial crisis as huge capital inflow entered into the US border and changed the housing structure and then gave rise to the easy mortgage credit and housing bubbles. However, this paper intends to find the link between the capital mobility and the financial crisis in order to see if this tragic outcome is inevitable when we have a relatively high capital mobility. The paper takes the stance that increase capital mobility is going to ultimately benefit the world economy as well as bring opportunities to countries that are ready to liberate their capital flow. The article is taking the case study approach and focuses on Europe Union before, during and after the financial crisis, as EU seems to be promising to have some convincing empirical evidence. The purpose of the paper is to show advantages of having a high