chapter 11 an introduction to international finance
TRANSCRIPT
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Chapter 11
An Introduction to International Finance
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Topics to be Covered
• Balance of payments
• Exchange rates
• Prices and exchange rates
• Interest and exchange rates
• Other topics
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Balance of Payments (BOP)
• BOP—a record of a country’s economic transactions with the rest of the world.
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Trade Surplus vs. Trade Deficit
• Trade surplus—occurs when a country’s merchandise exports exceed its imports.
• Trade deficit—occurs when a country’s merchandise imports exceed its exports.
• The U.S. has consistently run trade deficits, with 1975 as the last surplus year, while Japan, Germany, and Canada have had trade surpluses (refer to Figure 11.1).
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Exchange Rates
• Foreign Exchange Market (FEM)—the market where monies of different countries are traded.
• Exchange rate—price of one country’s money in terms of another.
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Features of Foreign Exchange Market
• Refer to Table 11.1 FEM Trading Volume
• The total volume of trade in the foreign exchange market was over $2.4 trillion in 2004.
• The largest markets are the United Kingdom, accounting for 31% of the market, and the U.S. with a 19% share.
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Features of FEM (cont.)
• Refer to Table 11.2
• The most traded currency is the U.S. dollar, accounting for 90% of the total amount traded.
• The dollar is followed by the euro, Japanese yen, and the British pound.
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Prices and Exchange Rates
• Purchasing Power Parity (PPP) holds when two currencies have the same purchasing power in the two countries.
• Chapter 14 will analyze the prices–exchange rate relationship in more detail.
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Big Mac PPP
• Refer to Table 11.3 Big Mac PPP
• If the price of a Big Mac hamburger was $1 in the U.S. and ¥100 in Japan and the ¥/$ exchange rate was 100, then the Big Mac PPP holds.
• PPP appears to hold more for Canada.
• China’s yuan is undervalued by 55% against the dollar, thus dollars will buy a lot in China. The reverse is true for Switzerland.
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Interest Rates and Exchange Rates
• Figure 11.2 shows that even countries with close and extensive economic ties can have independent movements in their interest rates.
• Interest differentials among countries may reflect expected exchange rate changes as well as risk premiums.
• Chapter 15 will discuss interest rates in more detail.
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Additional Major Topics to be Covered Later
• Foreign exchange risk—the risk of an unexpected change in the exchange rate.
• International investment—portfolio investment and direct investment.
• International monetary systems—history of international financial systems.
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Additional Topics (cont.)
• International banking—offshore banking and country risk analysis
• International macroeconomics—determination of equilibrium income, interest rates, and exchange rates in a global setting.