Multinational Financial Management, 10th solution manual ch_02

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1、21CHAPTER2:THEDETERMINATIONOFEXCHANGERATESCHAPTER2THEDETERMINATIONOFEXCHANGERATESThepurposeofthischapteristoexplainwhatanexchangerateisandhowitisdeterminedinafreely-floatingexchangerateregime,thatis,intheabsenceofgovernmentintervention.Thisisdoneusingasimpletwoc

2、ountrymodel.Becauseofitspervasiveness,wealsoexaminethedifferentformsandconsequencesofcentralbankinterventionintheforeignexchangemarkets.Sinceanexchangeratecanbeconsideredastherelativepriceoftwofinancialassets,thechapterdiscussestheassetmarketmodelofcurrenciesandt

3、heroleofexpectationsinexchangeratedetermination.Aseparatesectiondiscussestherealchangesinanation'seconomythatcauseexchangeratechanges.KeyPoints1.Absentgovernmentintervention,exchangeratesrespondtotheforcesofsupplyanddemand,which,inturn,dependonrelativeinflationra

4、tes,interestrates,andGNPgrowthrates.2.Monetarypolicyiscrucial.Ifthecentralbankexpandsthemoneysupplyatafasterratethanmoneydemand,thepurchasingpowerofmoneydeclinesbothathome(inflation)andabroad(currencydepreciation).3.Thehealthiertheeconomyis,thestrongerthecurrency

5、islikelytobe.4.Exchangeratesarecruciallyaffectedbyexpectationsoffutureexchangeratechanges,whichdependonforecastsoffutureeconomicandpoliticalconditions.5.Inordertoachievecertaineconomicorpoliticalobjectives,governmentsofteninterveneinthecurrencymarketstoaffectthee

6、xchangerate.Althoughthemechanicsofsuchinterventionvary,thegeneralpurposeofeachvariantisbasicallythesame:toincreasethemarketdemandforonecurrencybyincreasingthemarketsupplyofanother.Alternatively,thegovernmentcancontroltheexchangeratedirectlybysettingapriceforitscu

7、rrencyandthenrestrictingaccesstotheforeignexchangemarket.6.Acriticalfactorwhichhelpsexplainthevolatilityofexchangeratesisthatwithafiatmoneythereisnoanchortoacurrency'svalue,nothingaroundwhichbeliefscancoalesce.Sincepeopleareunsureaboutwhattoexpect,anynewpieceofin

8、formationcandramaticallyaltertheirbeliefs.Thus,iftheunderlyingdomesticeconomicpoliciesareunstable,exchangerateswillbevolatileastradersreacttonewinformation.SUG