copyright © 2009 pearson education, inc. publishing as prentice hall1 chapter 6: interest rate...
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Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
1
Chapter 6: Interest Rate ParityChapter 6: Interest Rate Parity
Power Points created by:
Joseph F. Greco Ph. D.
California State University, Fullerton
Mihaylo College of Business and Economics
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
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Chapter 6: Interest Rate ParityChapter 6: Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
6.2 Covered Interest Rate Parity in Practice
6.3 Problems Related to Testing Interest Rate Parity
6.4 Hedging Transaction Risk in the Money Market
6.5 The Term Structure of Forward Premiums and Discounts
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6.1 The Theory of Covered Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
The Theory of Covered Interest Rate Parity: Overview
• The Intuition Behind Interest Rate Parity
• Two Ways to Buy a Currency Forward
• Why There Must Be Interest Rate Parity
• Deriving Interest Rate Parity
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6.1 The Theory of Covered Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
• The Intuition Behind Interest Rate Parity
• Two Ways to Buy a Currency Forward
• Why There Must Be Interest Rate Parity
• Deriving Interest Rate Parity
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6.1 The Theory of Covered Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
• Two Ways to Buy a Currency Forward
• Buy a forward contract
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6.1 The Theory of Covered Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
• Why There Must Be Interest Rate Parity
• Covered interest rate arbitrage
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6.1 The Theory of Covered Interest Rate Parity
6.1 The Theory of Covered Interest Rate Parity
• Deriving Interest Rate Parity
• A general expression for interest rate parity
• Interest rate parity and forward premiums and discounts
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Exhibit 6.1Diagram of Covered Interest Arbitrage
Exhibit 6.1Diagram of Covered Interest Arbitrage
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Exhibit 6.2Kevin Anthony’s Arbitrage
Exhibit 6.2Kevin Anthony’s Arbitrage
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6.2 Covered Interest Rate Parity in Practice
6.2 Covered Interest Rate Parity in Practice
• The External Currency Market
• Transaction costs in the external currency market
• How the external currency market affects other capital markets
• London interbank offer rate (LIBOR)
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Exhibit 6.3Interest Rates in the External Currency Market
Exhibit 6.3Interest Rates in the External Currency Market
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6.2 Covered Interest Rate Parity in Practice
6.2 Covered Interest Rate Parity in Practice
• Covered Interest Arbitrage with Transaction Costs– An empirical test
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Exhibit 6.4Covered Interest Rate Parity with Bid-Ask Rates
Exhibit 6.4Covered Interest Rate Parity with Bid-Ask Rates
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Exhibit 6.5 – Panel A$/£ Covered Interest Arbitrage into £
Exhibit 6.5 – Panel A$/£ Covered Interest Arbitrage into £
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Exhibit 6.5 – Panel B$/£ Covered Interest Arbitrage into £
Exhibit 6.5 – Panel B$/£ Covered Interest Arbitrage into £
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6.3 Problems Related to Testing Interest Rate Parity
6.3 Problems Related to Testing Interest Rate Parity
• Default Risks
• Exchange Controls
• Political Risk
• The Thrilla in Manila
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Exhibit 6.6External and Internal FRF Interest Rates and Difference
Exhibit 6.6External and Internal FRF Interest Rates and Difference
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6.4 Hedging Transaction Risk in the Money Market
6.4 Hedging Transaction Risk in the Money Market
Hedging Transaction Risk - Money Market: Overview
• Introduction
• Hedging a Foreign Currency Liability
• Hedging a Foreign Currency Receivable
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6.4 Hedging Transaction Risk in the Money Market
6.4 Hedging Transaction Risk in the Money Market
• Introduction
• Synthetic forward
• Money market hedge
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6.4 Hedging Transaction Risk in the Money Market
6.4 Hedging Transaction Risk in the Money Market
• Hedging a Foreign Currency Liability
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6.4 Hedging Transaction Risk in the Money Market
6.4 Hedging Transaction Risk in the Money Market
• Hedging a Foreign Currency Receivable
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6.5 The Term Structure of Forward Premiums and Discounts
6.5 The Term Structure of Forward Premiums and Discounts
• The Term Structure of Interest Rates– Spot Interest Rates– A Review of Bond Pricing– Yields to Maturity– Deriving Long-Term Spot Interest Rates
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6.5 The Term Structure of Forward Premiums and Discounts
6.5 The Term Structure of Forward Premiums and Discounts
• Long-Term Forward Rates and Premiums