International-Financial-Management---Bekaert-2e---Solutions---Ch06Word文件下载.doc
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InterestRateParity
Chapter 6
InterestRateParity
QUESTIONS
1.Explaintheconceptsofpresentvalueandfuturevalue.
Answer:
Theseconceptsrelatetothetimevalueofmoney.Becauseinterestratesarepositive,agivenamountofmoneyinthefutureisnotworthasmuchtoday.Ifyouwanttoknowhowmuchafutureamountofmoneyisworth,youtakethepresentvalue.Thisistheamountthatyoucouldborrowagainstthefutureamountwhileusingthefutureamounttopaytheinterestplusprincipalontheloan.Analogously,thefuturevalueofanamountofmoneyavailabletodayisthevaluethatwouldbeavailableinthefutureifyouinvestedtodayandreceivedtheprincipalplusinterestontheinvestmentinthefuture.
2.Ifthedollarinterestrateispositive,explainwhythevalueof$1,000,000receivedeveryyearfor10yearsisnot$10,000,000today.
Ifyouweretoborrowagainsteachoftheannual$1,000,000payments,thebankwouldlendyouprogressivelysmalleramounts.Thepresentvalueofthe10paymentscouldbefoundbyusingthespotinterestrates,i(t,k),attimetforyeart+kinthefuture.Thepresentvaluewouldbe
3.Describehowyouwouldcalculatea5-yearforwardexchangerateofyenperdollarifyouknewthecurrentspotexchangerateandthepricesof5-yearpurediscountbondsdenominatedinyenanddollars.Explainwhythishastobethemarketprice.
The5-yearforwardratewouldbeequaltothespotrateofyenperdollartimestheratioofthefuturevaluein5yearsofoneyentothefuturevaluein5yearsofonedollar.Thelogicisthefollowing.Ifyoucaninvestdirectlyinyenfor5years,youcanconvertoneyenintothefuturevalueofoneyenin5years.Alternatively,youcanconverttheoneyenintodollarsinthespotforeignexchangemarket,investthatdollarprincipalfor5yearstogetthefuturevalueofdollars,andcontracttodaytosellthosedollarsintheforwardmarkettogetbacktofutureyenin5years.Ifthetwoamountsoffutureyendiffer,therewouldbeanarbitrageavailableinwhichyouwouldborrowfutureyenwheretheyarecheapandinvestinfutureyenwheretheyareexpensive.Hence,the5yearforwardrateshouldsatisfy
4.Ifinterestrateparityissatisfied,therearenoopportunitiesforcoveredinterestarbitrage.Whatdoesthisimplyabouttherelationshipbetweenspotandforwardexchangerateswhentheforeigncurrencymoneymarketinvestmentoffersahigherreturnthanthedomesticmoneymarketinvestment?
Iftheforeigncurrencymoneymarketinvestmentoffersahigherreturn(intheforeigncurrency)thanthedomesticmoneymarketinvestment,theforeigncurrencymustbeatadiscountintermsofthedomesticcurrencyintheforwardmarket.Theforwarddiscountlocksinacapitallosswhenthetransactionexchangeriskisoffset,whichreducesthehigherreturnoftheforeigncurrencybacktothelowerreturnofferedinthedomesticmoneymarket.
5.Itisoftensaidthatinterestrateparityissatisfiedwhenthedifferentialbetweentheinterestratesdenominatedintwocurrenciesequalstheforwardpremiumordiscountbetweenthetwocurrencies.Explainwhythisisanimprecisestatementwhentheinterestratesarenotcontinuouslycompounded.
Interestrateparityrequirestheequalityofreturnsfrominvestingdirectlyinthedomesticmoneymarketversusconvertingdomesticcurrencyintoforeigncurrency,investingtheforeigncurrency,andsellingtheforeigncurrencyforward.Symbolically,wehave
Ifwedividebyonbothsidesandsubtractonefrombothsides,weget
Theleft-handsideistheinterestdifferentialbetweenthedomesticandforeignratesadjustedforthedenominatortermandtheright-handsideistheforwardpremiumordiscountontheforeigncurrencyintermsofthedomesticcurrency.
6.Whatdoeconomistsmeanbytheexternalcurrencymarket?
Theexternalcurrencymarketisaninterbankmarketfordepositsandloansthataredenominatedincurrenciesthatarenotthecurrencyofthecountryinwhichthebankisoperating.Itssettlementproceduresareidenticaltothoseoftheforeignexchangemarket.Thefirstcurrencyforwhichthesedepositsandloansbegantotradewasthedollar,andthedepositswerecalledEurodollarsbecausetheyweredollar-denominateddepositsatEuropeanbanks.ThemarketforothercurrenciescametobecalledtheEurocurrencymarket,eventhoughthetradingmightbedoneinAsiaortheAmericas.Withtheadventoftheeuroasacurrency,thetermexternalcurrencymarketseemslessconfusing.
7.Whatdeterminesthebid–askspreadintheexternalcurrencymarket?
Whyisitusuallysosmall?
Thebid-askspreadintheexternalcurrencymarketisthedifferencebetweenthebidrate,whichistheinterestratethatthebankpaysoni
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- International Financial Management Bekaert Solutions Ch06
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