国际投资学第二章

Factors that affect Forex rate
In a flexible exchange rate system, the value of a currency is driven by changes in fundamental economic factors, amongst the factors are Differences in national inflation rates Changes in real interest rates Differences in economic performance Changes in investment climate
a market-determined price that reflects economic fundamentals at each point in time government got independent domestic monetary and fiscal policies Decrease speculation against Forex
Financial account

Covers investments by residents abroad and investments by nonresidents in the home country, it includes
Direct investments made by companies Portfolio investments in equity, bonds, and other securities of any maturity Other investments and liabilities (deposits or borrowing with foreign bank and vice versa)

Fiscal policy and Forex rate many economists believe that the net result of a more restrictive policy will be a depreciation of the home currency. a more expansionary fiscal policy has the reverse effect. the reaction will be somewhat stronger if the shift in fiscal policy is expected to be permanent rather than temporary.
Reduces exchange rate volatility in the short run. Also encourages monetary discipline for the home country. Can induce destabilizing speculation.

Advantages
Exports and imports of goods (trade balance) Services income (interest, dividends, and various investment income from cross-border investments) Current transfer (gift and other flows without quid pro quo compensation)
Exchange rate regimes
Historically, there are three different regimes Flexible exchange rates Fixed exchange rates Pegged exchange rates
Flexible exchange rates

CA+FA=overall balance IF overall balance is not zero, the monetary authority must use reserve assets (official reserves) to fill the gap
CA deficits is bad?
As long as foreign investors are willing to finance this difference by net capital flows into the country, the trade deficits poses no economic problem. CA<0 depreciation of home currency FA>0 appreciation of home currency as a result, the two effects can cancel each other Frequently, CA deficit can be deemed as bad politically. External financing of a country also increases the risk of crisis

Disadvantage

Pegged Exchange Rate Regime

Characterized as a compromise between a flexible and a fixed exchange rate.

The exchange rate is allowed to fluctuate within a (small) band around a target exchange rate (“peg”) and the target exchange rate is periodically revised to reflect changes in economic fundamentals.

Eliminates exchange rate risk, at least in the short run. Brings discipline to government policies Deprives the country of any monetary independence. Also constrains country’s fiscal policy. Its long-term credibility
Effect of Government policies on Forex and BOP

Monetary policy and Forex rate an expansionary monetary policy will lead to a depreciation of the home currency, while a restrictive monetary policy will lead to an appreciation of the home currency
Chp 2
foreign exchange parity relations
organization


Foreign exchange fundamentals, in particular the balance of payment and foreign exchange regimes International parity relations
Current account Financial account
Current account

Covers all current transaction that take place in the normal business of residents of a country, and be dominated by the trade balance, the balance of all exports and imports. CA is made up of


Disadvantage

International Parity Relations

The parity relations of international finance are as follows:

Interest rate parity relation Purchasing power parity relation. International Fisher relation. Uncovered interest rate parity relation. Foreign exchange expectation relation.
Forex Fundamental

Balance of payments
it tracks all financial flows crossing a country’s borders during a given period (one year). it is an accounting of all cash flows between residents and nonresidents of a country. Conventions: treat all inflows (exports or sale of domestic assets) as a credit to the BOP. International transaction are grouped into 2 main categories
International Parity Relations: Definitions

Βιβλιοθήκη The term spot rate (S) refers to the exchange rate for immediate delivery. The forward rate (F) is set on one date for delivery at a future specified date. For example, the $:¥forward exchange rate for delivery in six months might be F = 106.815 yen per dollar. rFC and rDC are the foreign and domestic interest rates (annualized). IFC and IDC are the foreign and domestic inflation rates (annualized).
Parity Relations




The purchasing power parity relation, linking spot exchange rates and inflation. The International Fisher relation, linking interest rates and expected inflation. The uncovered interest rate parity relation, linking spot exchange rates, expected exchange rates and interest rates. The foreign exchange expectation relation, linking forward exchange rates and expected spot exchange rates.


It is one in which the exchange rate between two currencies fluctuates freely in the foreign exchange market (government intervene only to smooth temporary imbalances). Advantage

Disadvantage Be quite volatile and bad for agents engaged in trade and investments
Fixed exchange rate


The exchange rate between two currencies remains fixed at a preset level, known as official parity. Advantage