32
ArbitrageThis!!
Facts & Figures
Credits & Debits
Model Behavior Potpourri
$100
$200
$300
$400
$500
$100 $100$100 $100
$200 $200 $200 $200
$300 $300 $300 $300
$400 $400 $400 $400
$500 $500 $500 $500
Final Jeopardy
$100 Arbitrage This!!
PPP implies that if inflation in the US is 4% while inflation in Europe is 2%, this should happen.
Return to Board
The dollar should depreciate by 2% against the Euro.
*% e
$200 Arbitrage This!!
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Suppose that the dollar is expected to depreciate. UIP suggests that this should happen to US interest rates
They should increase by the expected percentage change in the exchange rate
eii %*
$300 Arbitrage This!!
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UIP combined with PPP suggests this about inflation adjusted interest rates.
Real (inflation adjusted) interest rates should be equalized across countries.
** % eii
$400 Arbitrage This!!
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Consider the following exchange rates
EUR/USD = $1.50JPY/USD = $ .001JPY/EUR = E .002
You could make money by doing this.
Use Yen to buy Euros (the Euro is undervalued), use Euros to buy $ (the Euro is overvalued relative to $)
$500 Arbitrage This!!
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Suppose that Americans spend 80% of their income on services while Europeans spend 50% on services. A 10% worldwide increase in the cost of services would do this
The US would experience a real appreciation of 3% against the Euro
For Simplicity, assume that all prices are initially 1.
1
1
1*
**
RERe
PP
PPPP otherservicesotherservices
The following year we have the following.
97.08.1
)05.1(1
05.1)00.1)(5(.)10.1)(5(.
08.1$)00.1)($2(.)10.1)($8(.
00.1,10.1
00.1$,10.1$
*
*
**
P
ePRER
REEP
P
RPEP
PP
otherservices
otherservices
$500 Arbitrage This!!
Return to Board
Facts & Figures $100
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For most of the modern era, international financial markets have operated under this standard
The Gold Standard
Facts & Figures $200
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Trade in these “garage sale” assets dominates currency markets
Swaps
Facts & Figures $300
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$2 Billion dollars per day is roughly the size of this
US Trade Deficit
Facts & Figures $400
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This pair of financial economists revolutionized the field of option pricing
Fischer Black and Myron Scholes
Facts & Figures $500
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The Euro is currently selling for $1.28. If Eurozone interest rates are 4% while US interest rates are 3%, this should be the price of a 1 year Euro forward contract
$1.267
Credits and Debits $100
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US investors currently hold over $1T in foreign investments. Interest paid on these assets would show up as this in the current account
A credit (+) in Net Factor Payments (Income earned abroad)
Credits and Debits $200
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A positive entry in the financial account refers to this
Capital Inflow
Credits & Debits $300
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There has been talk of the Fed stepping in to increase the value of the dollar. This transaction would be recorded in this section of the BOP
US Official Reserve Assets
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An American MNC acquires a foreign subsidiary. This transaction would look like this in the BOP (Two entries)
(+) Foreign Acquisition of US Private Assets
(-) FDI
Daily Double: Debits & Credits
Credits and Debits $500
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US Aid to developing countries shows up like this in the BOP
A debit (-) in Net Unilateral Transfers
Model Behavior $100
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In the monetary model with flexible prices, this market takes center stage.
Money Market (Commodity Market)
Model Behavior $200
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The portfolio balance model can be distinguished from other exchange rate models by this unique feature
PPP and UIP do not hold
Model Behavior $300
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A 10% contraction of the US money supply would result in this if commodity prices are fully flexible
A 10% dollar appreciation
Model Behavior $400
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If commodity prices are fixed and capital is perfectly mobile, a 5% increase in the US money supply would cause this in the short run.
A depreciation (both real and nominal) of more than 5%
Model Behavior $500
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Currency prices tend to be extremely volatile. According to the monetary approach with flexible prices, this volatility is a result of this
Relative price changes
Potpourri $100
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This name could refer to an economic curve describing the relationship between exchange rates and trade balances or the sidekick to a pudgy, silent, stoner
Jay
Potpourri $200
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A Nobel Laureate was the topic of this 2001 Oscar winner
A Beautiful Mind
Potpourri $300
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If trade balances are all that matter for currency prices, then this is the source of volatility in currency markets
Low demand/supply elasticity
Potpourri $400
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If the elasticity of imports for the US is 3, this would need to happen to generate a 10% decline in US import expenditures.
A 5% nominal depreciation
Potpourri $500
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The necessary conditions for the J-Curve were developed by this pair of economists
Marshall and Lerner
Any general equilibrium model of exchange rates should contain interactions between thesefive markets
Final Jeopardy
Home money marketForeign money marketHome bond marketForeign bond marketCurrency market
