Professional Documents
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C14 Eng.
C14 Eng.
Policy
Twelfth Edition, Global Edition
Chapter 14
Exchange Rates and the
Foreign Exchange Market:
An Asset Approach
DOLLAR POUND
DOLLAR Day’s EURO EURO POUND Day’s
Jun 3 Currency Closing Mid Change Closing Mid Day’s Change Closing Mid Change
Argentina Argentine Peso 68.8026 0.0953 77.1927 0.3569 86.6673 0.3917
Australia Australian Dollar 1.4423 0.0088 1.6181
Negative 0.0088
0.0046 1.8168 Negative 0.0046
0.0053
Negative 0.0053
Costa Rican
Costa Rica Colon 577.1050 1.7850 647.4796 4.0960 726.9515 4.5235
Czech
Republic Czech Koruna 23.7213 0.0004 26.6139 0.0868 29.8805 0.0943
Denmark Danish Krone 6.6449 0.0199 7.4552 0.0019 8.3702 0.0012
Egypt Egyptian Pound 16.0836 0.1097 18.0449 0.1812 20.2598 0.2014
Hong Kong Hong Kong Dollar 7.7503 – 0.0002 8.6953 0.0279 9.7626 0.0303
DOLLAR POUND
DOLLAR Day’s EURO EURO POUND Day’s
Jun 3 Currency Closing Mid Change Closing Mid Day’s Change Closing Mid Change
Hungary Hungarian Forint 306.7205 2.1010 344.1232 1.2335
Negative 2.1010
386.3611 1
309.3157 17773.7017
Negative 309.3157 Negative 349.1678
Indonesia Rupiah
Israel Israeli Shekel 3.4763 0.0030 3.9002 0.0161 4.3789 0.0176
Japan Japanese Yen 108.8250 0.2400 122.0956 0.6644 137.0816 0.7317
..One Month Blank
108.8249 0.2399 122.0956 0.6644 137.0816 0.7316
..Three Month Blank
108.8248 0.2397 122.0956 0.6645 137.0815 0.7314
..One Year Blank
108.8242 0.2384 122.0957 0.6647 137.0816 0.7309
Kenya Kenyan Shilling 106.1000 0.3500
Negative 0.3500
1.7469 0.0099
Negative 0.0099
DOLLAR POUND
DOLLAR Day’s EURO EURO POUND Day’s
Jun 3 Currency Closing Mid Change Closing Mid Day’s Change Closing Mid Change
Pakistan Pakistani Rupee 164.2000 0.8500negative 0.8500
0.4180Negative 0.4180
Peruvian Nuevo
3.3860 0.0145Negative 0.0145
3.7989 0.0039
Negative 0.0039
Peru Sol
Philippines Philippine Peso 50.1200 0.2250Negative 0.2250
56.2318 0.0693
Negative 0.0693
4.8333 0.0050
Negative 0.0050
18.9791 0.1492
Negative 0.1492
10.4219 0.0062
Negative 0.0062
POUND
DOLLAR DOLLAR EURO EURO POUND Day’s
Jun 3 Currency Closing Mid Closing Mid Closing Mid Day’s Change Closing Mid Change
Turkey Turkish Lira 6.7298 0.0028 7.5504
Negative 0.0028
0.8907 0.0001
Kingdom Pound Sterling
..One Month 0.7939 0.0025
Negative 0.0025
0.8906 0.0001
..Three Month 0.7939 0.0025
Negative 0.0025
0.8905 0.0001
..One Year 0.7941 0.0025
Negative 0.0025
0.8901 0.0001
United States
1.1219
Negative 1.1219
1.2597 0.0040
..Three Month 1.1217 0.1338
Negative 0.1338
1.2597 0.0040
..One Year 1.1210 0.1338
Negative 0.1338
1.2599 0.0040
Venezuelan
Venezuela Bolivar Fuerte
Vietnamese
23262.0000 5.5000 26098.6896 90.7520 29302.0544 98.8350
Vietnam Dong
1.1227 0.0001
Negative 0.0001
Union Euro
1.1227 0.0001
Negative 0.0001
..Three
0.8911 0.0029 Negative 0.0029 Blank Blank
1.1226 0.0001
Negative 0.0001
Month Blank
Rates are derived from WM Reuters Spot Rates and MorningStar (latest rates at time of
production). Some values are rounded. Currency redenominated by 1000. The exchange
rates printed in this table are also available at www.FT.com/marketsdata.
Spot and forward exchange rates tend to move in a highly correlated fashion.
Source: Datastream. Rates shown are 90-day forward exchange rates and spot
exchange rates, at end of month.
($102 $100)
rate of return 2%
$100
Since dollar and yen interest rates are not measured in comparable terms, they can
move quite differently over time.
Source: Datastream. The figure shows three-month interest rates.
$100.88 $100
0.88%.
$100
• Let’s compare this rate of return with the rate of return from a dollar deposit.
– The rate of return is simply the interest rate.
– After 1 year the $100 is expected to yield $102:
$102 $100
2%
$100
• The euro deposit has a lower expected rate of return: thus, all investors
should be willing to dollar deposits and none should be willing to hold euro
deposits.
– 4% 3% 1% 0 88%
– E e $/ € E$/€€
R€ +
E$/ €€
R€
R sub euro start fraction upper E to the lower e power, sub $ per euro minus upper E sub $ per euro over upper E sub $ per euro end fraction
R$ R€
R sub $ minus R sub euro minus start fraction upper E to the lower e power, sub $ per euro minus upper E sub $ per euro over upper E sub $ per euro end fraction
E$/ € E$/ €€
0.02
E e $/ €€ E$/ €€
R$ R€
E$/ €
per Euro
E$/ € R€ start fraction upper 1.05 minus upper E sub $ per euro over upper E sub $ per euro end fraction
R€
E$/ € E$/ €
0.031
Given that E$e/ € 1.05 and R€€ 0.05 an appreciation of the dollar against
the euro raises the expected return on euro deposits, measured in terms of dollars.
A rise in the interest rate offered by dollar deposits from R$1 to R$2
1 2
causes the dollar to appreciate from E$/ € (point 1) to E$/ € (point 2).
A rise in the interest rate paid by euro deposits causes the dollar to depreciate from
E$1/ € (point 1) to E$2/ € (point 2). (This figure also describes the effect of a rise in the
The Australian dollar-yen carry trade has been profitable on average but is subject to
sudden large reversals, as in 2008.
Source: Quarterly Japanese yen/Australian dollar exchange rate, 90-day Australia bank bill rate, and 90-day
Japan certificate of deposit rate from FRED database. The chart compares the cumulative value over time of a ¥100
investment in Japanese interest-bearing 90-day bonds, rolled over every quarter, with the same yen investment
converted into Australian dollars, invested in 90-day Australian bonds and rolled over every quarter, and then
converted back into yen at the end of the investment period.
euro yield a dollar value after 1 year of $1.113 per euro €1.04 $1.158.
– The rate of return on the covered purchase of a euro deposit is
1.158 1.05 1.05 0.103. or 10.3%, is greater than a 10% rate
F$/ € E$/ €
E$/ €
Covered interest parity held well up until the financial crisis that started in 2008, but it has
not held closely since then. The three non-U.S. investment currencies shown are the
euro, pound, and yen.
with the covered interest parity condition, you will find that both
conditions can be true at the same time only if the 1-year
forward rate quoted today equals the spot exchange rate
people expect to materialize a year from today: F$/ €€ E$/e €€
• Covered transactions do not involve exchange rate risk,
whereas uncovered transactions do.