chap 4 jeff madura
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manajemen keuangan internasionalTRANSCRIPT
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Exchange Rate Determination4
Chapter
South-Western/Thomson Learning 2003
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Chapter Objectives
To explain how exchange rate movementsare measured;
To explain how the equilibrium exchangerate is determined; and
To examine the actors that aect theequilibrium exchange rate!
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"easuring
Exchange Rate "ovements #n exchange ratemeasures the value o one
currenc$ in units o another currenc$!
%hen a currenc$ declines in value& it is saidto depreciate! %hen it increases in value& it is
said to appreciate!
On the da$s when some currenciesappreciate while others depreciate against
the dollar& the dollar is said to be 'mixed in
trading!(
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"easuring
Exchange Rate "ovements The percentage change )* in the value
o a oreign currenc$ is computed as
+t, +t-.
+t-.
where Stdenotes the spot rate at time t.
# positive * represents appreciation othe oreign currenc$& while a negative *
represents depreciation!
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Exchange Rate Equilibrium
#n exchange rate represents the price o acurrenc$& which is determined b$ the
demand or that currenc$ relative to the
suppl$ or that currenc$!
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U.S. inflation U.S. demand for British goods, and
hence .
/actors that 0nluence
Exchange RatesRelative Inflation Rates
British desire for U.S. goods, and hence
the supply of .
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U.S. interest rates U.S. demand for British bank deposits,
and hence .
/actors that 0nluence
Exchange RatesRelative Interest Rates
British desire for U.S. bank deposits, and
hence the supply of .
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Relative Interest Rates
/actors that 0nluence
Exchange Rates
0t is thus useul to consider real interestrates& which adjust the nominal interest
rates or inlation!
# relativel$ high interest rate ma$ actuall$relect expectations o relativel$ highinlation& which discourages oreign
investment!
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Relative Interest Rates
/actors that 0nluence
Exchange Rates
This relationship is sometimes called the
Fisher effect!
real nominalinterest
interest , inlation rate rate rate
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U.S. income level U.S. demand for British goods, and
hence .
/actors that 0nluence
Exchange RatesRelative Income Levels
No epected change for the supply of .
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Government Controls
1overnments ma$ inluence the equilibrium
exchange rate b$2! imposing foreign echange barriers,! imposing foreign trade barriers,! intervening in the foreign echange market,
and! affecting macro variables such as inflation,
interest rates, and income levels.
/actors that 0nluence
Exchange Rates
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Expectations
/oreign exchange mar3ets react to an$
news that ma$ have a uture eect!
0nstitutional investors oten ta3e currenc$positions based on anticipated interest rate
movements in various countries! ecause o speculative transactions&
oreign exchange rates can be ver$ volatile!
/actors that 0nluence
Exchange Rates
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Expectations
/actors that 0nluence
Exchange Rates
"ed chairman suggests "ed is Strengthenedunlikely to cut U.S. interest rates
# possible decline in $erman Strengthenedinterest rates
%entral banks epected to &eakenedintervene to boost the euro
Signal 'mpact on (
)oor U.S. economic indicators &eakened
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Interaction of Factors
Trade-related actors and inancial actors
sometimes interact! Exchange ratemovements ma$ be simultaneousl$
aected b$ these actors!
/or example& an increase in the level oincome sometimes causes expectations o
higher interest rates!
/actors that 0nluence
Exchange Rates
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Interaction of Factors
/actors that 0nluence
Exchange Rates
The sensitivit$ o the exchange rate to
these actors is dependent on the volumeo international transactions between the
two countries!
Over a particular period& dierent actorsma$ place opposing pressures on thevalue o a oreign currenc$!
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How Factors Have Influenced Exchange Rates
ecause the dollar5s value changes b$
dierent magnitudes relative to eachoreign currenc$& anal$sts oten measure
the dollar5s strength with an index!
The weight assigned to each currenc$ isdetermined b$ its relative importance in
international trade and6or inance!
/actors that 0nluence
Exchange Rates
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0mpact o Exchange Rates on an "7C5s 8alue
( ) ( )[ ]( )
+
=
n
tt
m
tt
!*+
*,,
*
-%"+alue
E )C/j,t 9 : expected cash lows in
currenc$jto be received b$ the !+! parent at the
end o period t
E )ERj,t 9 : expected exchange rate at
which currenc$jcan be converted to dollars at
0nlation Rates& 0nterest Rates&0ncome
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"easuring Exchange Rate "ovements
Exchange Rate Equilibrium! /emand for a %urrency! Supply of a %urrency for Sale! 0uilibrium
Chapter Review
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Chapter Review
/actors that 0nluence Exchange Rates! -elative 'nflation -ates
! -elative 'nterest -ates! -elative 'ncome 1evels! $overnment %ontrols! pectations
! 'nteraction of "actors! 2ow "actors 2ave 'nfluenced change
-ates
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Chapter Review
=ow Exchange Rates #ect an "7C5s8alue