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# Assuming a risk premium one can deduce g ε 1 p actio

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Assuming a risk premium one can deduce g = ε ° 1 P actio / D + r Growth rate of dividents expected by the market. Class 1

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Taux de croissance anticipé des bénéfices -8 -6 -4 -2 0 2 4 6 8 28/04/2007 06/08/2007 14/11/2007 22/02/2008 01/06/2008 09/09/2008 18/12/2008 28/03/2009 06/07/2009 14/10/2009 prime 3,5 prime 4,5 prime 5,5 Class 1
The Exchange Rate The nominal exchange rate E is the relative price of two di∕erent kind of money, in the foreign exchange market . 1 e = E \$ . Appreciation of the euro : E increases. Class 1

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Real exchange rate : How many apple in US do I have against one apple in Europe ? Class 1
Real exchange rate : How many apple in US do I have against one apple in Europe ? Money Good Europe( e ) P t e °! 1 unit of good # US (\$) P t E t \$ °! P t E t / P ² t Class 1

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Real exchange rate : How many apple in US do I have against one apple in Europe ? Money Good Europe( e ) P t e °! 1 unit of good # US (\$) P t E t \$ °! P t E t / P ² t 1 apple EU = P t e = E t P t \$ = E t P t P ² t apples US Class 1
Real exchange rate : How many apple in US do I have against one apple in Europe ? Money Good Europe( e ) P t e °! 1 unit of good # US (\$) P t E t \$ °! P t E t / P ² t 1 apple EU = P t e = E t P t \$ = E t P t P ² t apples US Real exchange rate ε t = E t P t P ² t Class 1

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Uncovered Interest Rate Parity Lack of arbitrage opportunity implies that the return on 1 e invested on European ±nancial markets from today to next year, is equal (on average) to the return of 1 e converted in \$ , put on US ±nancial markets, on converted in e next year. Class 1
Uncovered Interest Rate Parity Lack of arbitrage opportunity implies that the return on 1 e invested on European ±nancial markets from today to next year, is equal (on average) to the return of 1 e converted in \$ , put on US ±nancial markets, on converted in e next year. This year Next year European ±nancial markets ( e ) 1 e °! 1 + i t Foreign Exchange Market 1 e E t ( 1 + i t ) 1 E e t + 1 # " US ±nancial markets(\$) E t \$ °! E t ( 1 + i ² t ) Class 1

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Uncovered Interest Rate Parity Lack of arbitrage opportunity implies that the return on 1 e invested on European ±nancial markets from today to next year, is equal (on average) to the return of 1 e converted in \$ , put on US ±nancial markets, on converted in e next year. This year Next year European ±nancial markets ( e ) 1 e °! 1 + i t Foreign Exchange Market 1 e E t ( 1 + i t ) 1 E e t + 1 # " US ±nancial markets(\$) E t \$ °! E t ( 1 + i ² t ) Hence, 1 + i t = E t ( 1 + i ² t ) 1 E e t + 1 Class 1
This equation is, at the ±rst order ( i ² t ² ° E e t + 1 ° E t ± is small and neglected) i t = i ² t ° E e t + 1 ° E t E e t + 1 (Recall increase in E = appreciation of domestic currency) E e t + 1 ° E t E e t + 1 is the expected rate of appreciation. i t is the nominal exchange rate between t and t + 1 in Europe i ² t is the nominal interest rate between t and t + 1 in the US E t is the exchange rate e /\$ at date t E a t + 1 is the expected exchange rate between e /\$ at period t + 1 anticipated at date t Class 1

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The Current Account De±nition Agents who stay more than a year outside the economy are not residents. They pay their taxes outside the country. Residents can work less than a year in foreign countries, they can receive dividends and interest payments from abroad. Denote U nets transfers receive by residents from abroad.
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