﻿ Essay范文-Relative purchasing power parity is another version of purchasing power parity-51Due留学教育

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2021-10-29 来源: 51Due教员组 类别: Essay范文

Chapter 7, question 1

The law of one price states that the price of a good selling in two different places or counties should be the same if there are no other extra costs associated with the sale, for example, quotas, taxes, restrictions and etc. Theoretically there should be no arbitrage opportunities if the law of one price holds across different markets.

Absolute purchasing power parity states that the spot exchange rate of different currencies should be determined using the relative prices of the same good sold in those different countries. In equation form,

Relative purchasing power parity is another version of the PPP. It states that the change in exchange rate over a period of time is determined by the change of price of goods over a period of time between the two different countries. As we all know, there is inflation for goods over time in both countries. So this version of PPP takes inflation into account and any movements in spot exchange rate can be offset by an equal amount of change in inflation in the opposite direction.

Chapter 7, question 2

A nominal effective exchange rate index is constructed by taking the data on the spot exchange rates for different countries over a period of time and used those data to create an index. We only know that a certain currency changed by a certain number; however, we do not know whether this change is large or small relative to another time period or relative to another country. The nominal effective exchange rate index is not useful when you want to compare this number with other numbers. The difference between the nominal effective change rate index and a real effective exchange rate index is that the latter is based on a base year. You can always compare your current number with that of the base year to get the percentage change and you can know more about the true value of a certain currency. The real effective exchange rate gives you more information about inflation and other events that has happened in a country and the impact on the real value of the currency.

Chapter 8, question 1

Foreign currency options and futures are financial derivative instruments that provides investors with opportunities to make money. Foreign currency options can be divided into call options and put options. A party who is long the call option has the right, but not the obligation, to buy the underlying good at a pre-specified period of time at a pre-specified price. If the price of the underlying increases, then the party will exercise the option so that he can buy the good at a lower price. A party who is long the put option has the right, but not the obligation to sell the underlying good at a certain time at the agreed price. If the price of the underlying decreases, then the party will exercise the option so that he can sell the good at a higher price.

A party who long the futures contracts can, at a future date, buy the underlying foreign exchange at a price that is predetermined. Those are standardized contracts that are marked to market every day. The long party can gain an amount equal to the notional principal * (spot-future rate). The difference between futures and options is that futures contracts costs nothing to enter while options do cost a small amount of money to buy.

Chapter 9, question 3

The fundamental equilibrium path for a currency value is the range for which the exchange rate of a currency can move based on empirical research from past years. This range is determined by the theories that the textbook has taught us in previous sections such as the purchasing power parity, international parity condition, and etc. Those are the fundamentals that influence the exchange rate of a currency. From empirical evidence, people made a graph of how a certain currency would move and this line is the fundamental equilibrium path. Noise is short term fluctuations of the exchange rate of a certain currency around the long term value. So exchange rates move not according to a line, but according to a band above or below the line. The area in the band is the noise.

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