Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
\
|
=
=
- -
-
-
0 1
0 1
0 1
0 0
1 1
0
1
/
/
/
/
P P
P P
S S
P P
P P
S
S
(cont.)
4-20
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Deriving PPP from the S-D model (cont.)
(
+
+
=
-
P
P
S S
1
1
0 1
4-21
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The PPP exchange rate
(
=
- -
0
0
0
/
/
P P
P P
S S
t
t
t
4-22
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Derivation from PPP
(
=
S
S S
D 100
4-23
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
PPP and the real exchange rate
) / (
) / (
1 1 1 1
0 0 0 0
P P S Q
P P S Q
-
-
=
=
(cont.)
4-24
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
PPP and the real exchange rate (cont.)
) 1 (
) 1 (
) 1 (
0 1
0 1
0 1
- - -
+ =
+ =
+ =
P P P
P P P
S S S
(cont.)
4-25
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
PPP and the real exchange rate (cont.)
0 1
0
0
0
) 1 (
) 1 (
) 1 (
Q Q
P P
P P
S S
=
+
+
= +
- -
4-26
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The empirical validity of PPP
There is little empirical evidence to support the
validity of PPP, particularly in the short run.
There is some evidence for PPP under hyperinflation
and over long periods of time.
4-27
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Monthly exchange rate
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1983Q4 1987Q2 1990Q4 1994Q2 1997Q4 2001Q2 2004Q4 2008Q2
Actual PPP
4-28
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Monthly changes in Exchange rate
-40
-30
-20
-10
0
10
20
30
1983Q4 1987Q2 1990Q4 1994Q2 1997Q4 2001Q2 2004Q4 2008Q2
4-29
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
PPP as a trading rule
) , , , (
2 1 n
X X X S F S
P
P
f S
=
|
.
|
\
|
=
-
Buy when and sell when S S >
S S <
4-30
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The monetary model of exchange rates
Y kP
M
S
kY
M
P
kPY M
d
-
=
=
=
4-31
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Predictions of the monetary model
A monetary expansion leads to depreciation of the
domestic currency.
A rise in income leads to appreciation of the
domestic currency.
A rise in foreign prices leads to appreciation of the
domestic currency.
4-32
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Determination of the bid-offer spread
Since the bid rate is the rate at which the dealer buys
and the customer sells, it is determined by the
intersection of the dealers demand curve and the
customers supply curve.
Conversely, the offer rate is determined by the
intersection of the customers demand curve and the
dealers supply curve.
4-33
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Determination of the forward spread
The nave model is based on the assumption that
there are independent demand and supply forces in
the spot and forward markets.
It also assumes that there is a separate market with
independent supply and demand forces for forward
contracts with different maturities.
(cont.)
4-34
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Determination of the forward spread (cont.)
The equilibrium spot exchange rate is determined in
the spot market, whereas the equilibrium forward
rate (for a particular maturity) is determined in the
forward market.
The forward spread is the difference between the
forward and spot rates.
4-35
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Factors affecting the PKR exchange rates
Interest rates
Commodity prices and the terms of trade
Inflation
The external account
The role of the State bank of Pakistan
4-36
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
Pakistan exchange rates
4-37
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The role of the State bank of Pakistan
The SBP intervenes in the foreign exchange market
for three reasons:
(i) to calm the market when it tends to become
disorderly;
(ii) to help reverse exchange rate overshooting;
(iii) to give monetary policy greater room
(cont.)
4-38
Copyright 2010 McGraw-Hill Australia Pty Ltd
PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa
The role of the SBP (cont.)
Direct intervention by the SBP takes the form of
smoothing and testing transactions.
Smoothing transactions aims to ease the volatility of
the currencys path in reaction to news to prevent
exchange rate overshooting.
By testing, SBP tries to discern market volatility
from trends.
4-39