379-c04-outline - PARITY CONDITIONS IN INTERNATIONAL...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 PARITY CONDITIONS IN INTERNATIONAL FINANCE
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 PART I: ARBITRAGE AND THE LAW OF ONE PRICE I. THE LAW OF ONE PRICE Identical goods should sell for the same price worldwide. Theoretical basis: Enforced by international arbitrage. If the price, after exchange-rate adjustment were not equal, arbitrage in the goods worldwide would ensure that it eventually would. The Five Parity Conditions Result From These Arbitrage Activities Purchasing Power Parity (PPP) The Fisher Effect (FE) The International Fisher Effect (IFE) Interest Rate Parity (IRP) Unbiased Forward Rate (UFR)
Background image of page 2
3 The Five Parity Conditions are Linked by: The adjustment of various rates and prices to inflation. The notion that money should have no effect on real variables (since they have been adjusted for price changes). Inflation and home currency depreciation: o Jointly determined by the growth of domestic money supply relative to the growth of domestic money demand.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 PART II: PURCHASING POWER PARITY THE THEORY OF PURCHASING POWER PARITY Spot exchange rates between currencies should change to adjust to the differential in inflation rates between countries. ABSOLUTE PURCHASING POWER PARITY Price levels adjusted for exchange rates should be equal between countries RELATIVE PURCHASING POWER PARITY The exchange rate of one currency against another will adjust to reflect changes in the price levels of the two countries.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/02/2011 for the course ECON 101 taught by Professor Mikson during the Spring '08 term at Aarhus Universitet.

Page1 / 10

379-c04-outline - PARITY CONDITIONS IN INTERNATIONAL...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online