Multinational Financial Management, 10th solution manual ch_04

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1、21CHAPTER4:PARITYCONDITIONSININTERNATIONALFINANCE/CURRENCYFORECASTINGCHAPTER4PARITYCONDITIONSININTERNATIONALFINANCEANDCURRENCYFORECASTINGThischapteremphasizesthatcurrencypricesaredeterminedinthesamewaythatotherassetpricesare,bytheinteractionofsupplyanddemandcurves.Thekeyconcepthere

2、istherelationshipbetweeninflationandexchangeratechangestheinternaldevaluationofacurrency(inflation)eventuallyleadstoitsexternaldevaluation.KeyPoints1.Inflationisthelogicaloutcomeofanexpansionofthemoneysupplyinexcessofrealoutputgrowth.Asthesupplyofonecommodityincreasesrelativetosu

3、ppliesofallothercommodities,thepriceofthefirstcommoditymustdeclinerelativetothepricesofothercommodities.Inotherwords,itsvalueinexchangeorexchangeratemustdecline.Similarly,asthesupplyofmoneyincreasesrelativetothesupplyofgoodsandservices,thepriceofmoneyintermsofgoodsandservicesmustde

4、cline,i.e.,theexchangeratebetweenmoneyandgoodsdeclines.2.Theinternationalparalleltoinflationisdomesticcurrencydepreciationrelativetoforeigncurrencies.Inordertomaintainthesameexchangeratebetweenmoneyandgoodsbothdomesticallyandabroad,theforeignexchangeratemustdeclineby(approximately)

5、thedifferencebetweenthedomesticandforeignratesofinflation.Thisispurchasingpowerparity,whichisitselfbasedonthelawofoneprice.3.Althoughthenominaloractualmoneyexchangeratemayfluctuateallovertheplace,wewouldnormallyexpecttherealorinflation-adjustedexchangeratetoremainrelativelyconstant

6、overtime.Thesameistruefornominalversusrealratesofinterest.However,althoughthepredictionthatrealinterestandexchangerateswillremainconstantovertimeisareasonableoneexante,expostwefindthattheserealrateswanderallovertheplace.AswewillseeinChapter11,achangingrealexchangerateisthemostimpor

7、tantsourceofexchangeriskforcompanies.4.Fouradditionalequilibriumeconomicrelationshipstendtoholdininternationalfinancialmarkets:purchasingpowerparity,theFishereffect,internationalFishereffect,interestrateparity,andtheforwardrateasanunbiasedestimateofthefuturespotrate.5.Theseequilibr

8、iumrelationshipsareatthehe