Note #10

Note #10 - I Domestic deposit return 1& 1 R domestic I...

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ECON 133 Securities Markets Lecture 10 Jia-Yuh Chen August 17, 2009
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Stock of the Day I I PowerShares DB G10 Currency Harvest (DBV) I An ETF to do the carry trade
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Foreign Exchange Rates I Why do we care? I Two ways of quoting I indirect quote: euro/$ I direct quote: $/euro I Appreciation/depreciation instead of up/down I Two views of exchange rates I currency price as a macro variable I I What determines the exchange rate? I Market? I Government?
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Purchasing Power Parity I No arbitrage across borders? I The law of one price I P domestic E = P foreign I Big Mac Index I The Economist compiles the index I Big Mac sells for di/erent prices in di/erent countries I I Why do they di/er? I Not pro±table to do physical arbitrage I Rely on non-tradable inputs
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Uncovered Interest Parity I No arbitrage across borders? I Financial assets are easier to arbitrage I Two investments with 1 dollar:
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Unformatted text preview: I Domestic deposit return: 1 & ( 1 + R domestic ) I Foreign deposit return: 1 & E & ( 1 + R foreign ) / E 1 I No arbitrage: 1 + R domestic = E & ( 1 + R foreign ) / E 1 I High interest currencies should depreciate I The carry trade takes advantage of the violation of uncovered interest parity I Picking up pennies in front of a 18-wheeler Exchange Rate Regime I Free &oat I dollar I euro I yen I Managed/dirty &oat I Mexican peso I NT$ I Korean won I Fixed/pegged I HK$ I Chinese yuan FX Market I Most actively traded currencies I euro/dollar I dollar/yen I british pound/dollar I Over-the-counter (OTC) market I 24 hours a day I Dealers I Low margin I Who are the traders? I Commercial banks I Speculators I Individuals I Central banks I Other FX tools I Forwards I Futures I Swaps...
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This note was uploaded on 04/07/2010 for the course ECON 133 taught by Professor Chen during the Summer '09 term at UCSC.

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Note #10 - I Domestic deposit return 1& 1 R domestic I...

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