C14 Krugman 11e Revised

International Economics: Theory and
Policy
Eleventh Edition, Global Edition
Chapter 14
Exchange Rates and
the Foreign
Exchange Market:
An Asset Approach
Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Learning Objectives
14.1 Relate exchange rate changes to changes in the relative prices
of countries’ exports.
14.2 Describe the structure and functions of the foreign exchange
market.
14.3 Use exchange rates to calculate and compare returns on assets
denominated in different currencies.
14.4 Apply the interest parity condition to find equilibrium
exchange rates.
14.4 Find the effects of interest rates and expectation shifts on
exchange rates.

Preview
• The basics of exchange rates
• Exchange rates and the prices of goods
• The foreign exchange markets
• The demand of currency and other assets
• A model of foreign exchange markets
– role of interest rates on currency deposits
– role of expectations of exchange rates

Definitions of Exchange Rates
• Exchange rates are quoted as foreign currency per unit of
domestic currency or domestic currency per unit of foreign
currency.
– How much can be exchanged for one dollar?

– How much can be exchanged for one yen?
– Dollar per foreign currency unit : Direct ( or “American”)
terms
– Foreign currency units per dollar : Indirect ( or “European”)
terms)

Table 14.1 Exchange Rate Quotations (1 of 5)
CURRENCIES
DOLLAR EURO EURO POUND POUND
DOLLAR Day’s Closing Day’s Closing Day’s
Jan 19 Currency Closing Mid Change Mid Change Mid Change
Argentina Argentine Peso 15.9795 0.0015 16.9597 −0.1293 19.6613 −0.0603
Australia Australian Dollar 1.3250 0.0031 1.4061 −0.0076 1.6303 −0.0014
Bahrain Bahrainin Dinar 0.3771 0.0000 0.4001 −0.0030 0.4639 −0.0014
Bolivia Bolivian Boliviano 6.9300 - 7.3538 −0.0568 8.5267 −0.0269
Brazil Brazilian Real 3.2087 −0.0094 3.4049 −0.0363 3.9480 −0.0241
Canada Canadian Dollar 1.3327 0.0233 1.4142 0.0139 1.6398 0.0235
Chile Chilean Peso 661.4250 2.0350 701.8740 −3.2428 813.8212 −0.0597
China Chinese Yuan 6.8766 0.0424 7.2971 −0.0110 8.4610 −0.0256
Colombia Colombian Peso 2942.8500 7.4950 3122.8189 −16.0953 3620.9004 −2.1895
Costa Rica Costa Rican Colon 553.0400 3.3600 586.8608 −0.9380 680.4637 1.9971
Czech Republic Czech Koruna 25.4634 0.1957 27.0206 0.0007 31.3303 0.1426
Denmark Danish Krone 7.0073 0.0534 7.4358 −0.0003 8.6218 0.0387
Egypt Egyptian Pound 18.9085 0.0350 20.0648 −0.1175 23.2651 −0.0303
Hong Kong Hong Kong Dollar 7.7569 0.0008 8.2313 −0.0626 9.5441 −0.0291

DOLLAR EURO POUND
DOLLAR Day’s EURO Day’s POUND Day’s
Jan 19 Currency Closing Mid Change Closing Mid Change Closing Mid Change
Hungary Hungarian Forint 290.9580 3.0774 308.7513 0.9071 357.9963 2.6673
India Indian Rupee 68.1625 0.1060 72.3309 −0.4451 83.8675 −0.1342
Indonesia Indonesian Rupiah 13373.5000 31.0000 14191.3620 −76.4156 16454.8381 −13.7391
Israel Israeli Shekel 3.8222 0.0157 4.0559 −0.0145 4.7029 0.0045
Japan Japanese Yen 115.2950 2.0200 122.3458 1.2155 141.8596 2.0450
..One Month Blank 115.2949 2.0198 122.3458 1.2156 141.8596 2.0449
..Three Month Blank 115.2945 2.0191 122.3458 1.2156 141.8594 2.0445
..One Year Blank 115.2927 2.0155 122.3459 1.2156 141.8596 2.0437
Kenya Kenyan Shilling 103.9000 - 110.2539 −0.8512 127.8392 −0.4039
Kuwait Kuwaiti Dinar 0.3054 0.0002 0.3240 −0.0023 0.3757 −0.0009
Malaysia Malaysian Ringgit 4.4490 0.0045 4.7211 −0.0316 5.4741 −0.0117
Mexico Mexican Peson 21.9550 0.1729 23.2976 0.0050 27.0136 0.1280
New Zealand New Zealand Dollar 1.3942 0.0049 1.4795 −0.0061 1.7154 0.0007
Nigeria Nigerian Naira 304.7500 −10.0000 323.3868 −13.1902 374.9662 −13.5278
Norway Norwegian Krone 8.4894 0.0389 9.0086 −0.0279 10.4454 0.0151

DOLLAR DOLLAR EURO POUND
Closing Day’s EURO Day’s POUND Day’s
Jan 19 Currency Mid Change Closing Mid Change Closing Mid Change
Pakistan Pakistani Rupee 104.8050 - 111.2143 −0.8587 128.9527 −0.4075
Peru Peruvian Nuevo Sol 3.3408 −0.0062 3.5451 −0.0340 4.1105 −0.0206
Philippines Philippine Peso 49.9875 0.1900 53.0445 −0.2064 61.5049 0.0402
Poland Polish Zloty 4.1188 0.0378 4.3707 0.0067 5.0678 0.0306
Romania Romanian Leu 4.2381 0.0334 4.4973 0.0010 5.2146 0.0248
Russia Russian Ruble 59.8644 0.5419 63.5254 0.0890 73.6575 0.4361
Saudi Arabia Saudi Riyal 3.7505 −0.0001 3.9798 −0.0308 4.6146 −0.0147
Singapore Singapore Dollar 1.4296 0.0082 1.5170 −0.0029 1.7590 0.0046
South Africa South African Rand 13.6088 0.1300 14.4410 0.0275 16.7443 0.1075
South Korea South Korean Won 1177.6000 10.8500 1249.6154 1.9545 1448.9259 8.8139
Sweden Swedish Krona 9.0063 0.0963 9.5571 0.0292 11.0814 0.0839
Switzerland Swiss Franc 1.0107 0.0091 1.0725 0.0014 1.2435 0.0072
Taiwan New Taiwan Dollar 31.5900 0.0465 33.5219 −0.2091 38.8685 −0.0654
Thailand Thai Baht 35.3785 0.0680 37.5420 −0.2171 43.5299 −0.0536
Tunisia Tunisian Dinar 2.3061 0.0244 2.4471 0.0072 2.8374 0.0212

Turkey Turkish Lira 3.8317 0.0630 4.0660 0.0359 4.7145 0.0628
United Arab
Emirates UAE Dirham 3.6731 0.0001 3.8977 −0.0300 4.5194 −0.0142
United Kingdom Pound Sterling 0.8127 0.0026 0.8624 −0.0039 - -
..One Month blank 0.8128 0.0026 0.8624 −0.0039 - -
..Three Month blank 0.8130 0.0026 0.8623 −0.0039 - -
..One Year blank 0.8141 0.0026 0.8616 −0.0039 - -
United States United States Dollar - - 1.0612 −0.0082 1.2304 −0.0039

..One Month blank - - 1.0610 −0.1731 1.2305 −0.0039
..Three Month blank - - 1.0607 −0.1731 1.2307 −0.0039
..One Year blank - - 1.0589 −0.1732 1.2318 −0.0038
Venezuelan Bolivar
Venezuela Fuerte 9.9950 0.0050 10.6062 −0.0765 12.2979 −0.0327
Vietnam Vietnamese Dong 22565.0000 −8.0000 23944.9840 −193.3965 27764.1271 −97.6229

European Union Euro 0.9424 0.0072 - - 1.1595 0.0052
..One Month blank 0.9422 0.0072 - - 1.1594 0.0053
..Three Month blank 0.9419 0.0072 - - 1.1594 0.0052
..One Year blank 0.9401 0.0072 - - 1.1587 0.0053
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.

Depreciation and Appreciation (1 of 4)
• Depreciation is a decrease in the value of a currency relative to
another currency.
– A depreciated currency is less valuable (less expensive) and
therefore can be exchanged for (can buy) a smaller amount
of foreign currency.
– $1/ → $1.20/€ means that the dollar has depreciated relative
to the euro. It now takes $1.20 to buy one euro, so that the
dollar is less valuable.
– The euro has appreciated relative to the dollar:
it is now more valuable.

• Depreciation is a decrease in the value of a currency relative to
another currency.
– 1000Won/$ → 1300Won/$ means that the Korean Won
has depreciated relative to the dollar. It now takes 1300Won
to buy one dollar, so that the Korean Won is less valuable.
– The dollar has appreciated relative to the Korean Won: it is
now more valuable.

• Appreciation is an increase in the value of a currency relative to
another currency.
– An appreciated currency is more valuable (more expensive)
and therefore can be exchanged for (can buy) a larger
amount of foreign currency.
– $1/€ → $0.90/€ means that the dollar has appreciated
relative to the euro. It now takes
only $0.90 to buy one euro, so that the dollar is more
valuable.
– The euro has depreciated relative to the dollar:
it is now less valuable.

• Appreciation is an increase in the value of a currency relative to
another currency.
– 1200Won/$ → 1000Won/$ means that the Korean Won
has appreciated relative to the dollar. It now takes only
1000Won to buy one dollar, so that the Korean Won is more
valuable.
– The dollar has depreciated relative to the Korean Won: it is
now less valuable.

• A depreciated currency is less valuable, and therefore it can buy
fewer foreign produced goods that are denominated in foreign
currency.
– US produced good: $10
– When 1000Won/$, it is 10000won in Korea
– When 1300Won/$, it is 13000won in Korea, which is
more expensive now.
• A depreciated currency means that imports are more expensive

and domestically produced goods and exports are less expensive.
• A depreciated currency lowers the price of exports relative to the
price of imports.
An appreciated currency is more valuable, and therefore it can buy
more foreign produced goods that are denominated in foreign
currency.
– US produced good: $10
– When 1200Won/$, it is 12000won in Korea
– When 1000Won/$, it is 10000won in Korea, which is
cheaper now
• An appreciated currency means that imports are less expensive

and domestically produced goods and exports are more
expensive.
• An appreciated currency raises the price of exports relative to
the price of imports.
Table 14.2 $/£ Exchange Rates and the Relative Price
of American Designer Jeans and British Sweaters
Exchange rate $/£ 1.25 1.50 1.75
Relative price (pairs of jeans/sweater) 1.39 1.67 1.94
Note: The above calculations assume unchanged money prices of

$40 per pair of jeans and £50 per sweater.

Foreign Exchange Markets (1 of 4)
• The set of markets where foreign currencies and other assets
are exchanged for domestic ones
– Institutions buy and sell deposits of currencies or other
assets for investment purposes.
• The daily volume of foreign exchange transactions was $4.0
trillion in April 2010
– up from $500 billion in 1989.
• Most transactions (85% in April 2010) exchange foreign
currencies for U.S. dollars.

The participants:
1. Commercial banks and other depository institutions: transactions involve
buying/selling of deposits in different currencies for investment purposes.
2. Non-bank financial institutions (mutual funds, hedge funds, securities
firms, insurance companies, pension funds) may buy/sell foreign assets for
investment.
3. Non-financial businesses conduct foreign currency transactions to buy/sell
goods, services and assets.
4. Central banks: conduct official international
reserves transactions.

• Buying and selling in the foreign exchange market are
dominated by commercial and investment banks.
– Inter-bank transactions of deposits in foreign currencies
occur in amounts $1 million or more
per transaction.
– Central banks sometimes intervene, but the direct effects
of their transactions are small and transitory in many
countries.

• Computer and telecommunications technology transmit
information rapidly and have integrated markets.
• The integration of financial markets implies that there can be no
significant differences in exchange rates across locations.
– Arbitrage: buy at low price and sell at higher price for a
profit.
– If the euro were to sell for $1.1 in New York and $1.2 in
London, could buy euros in New York (where cheaper) and
sell them in London at a profit.

Spot Rates and Forward Rates
• Spot rates are exchange rates for currency exchanges “on the
spot,” or when trading is executed in the present.
• Forward rates are exchange rates for currency exchanges that
will occur at a future (“forward”) date.
– Forward dates are typically 30, 90, 180, or 360 days in the
future.
– Rates are negotiated between two parties in the present, but
the exchange occurs in the future.

Figure 14.1 Dollar/Pound Spot and
Forward Exchange Rates, 1983–2016
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.
Other Methods of Currency Exchange (1 of 3)
• Foreign exchange swaps: a combination of a spot sale with a
forward repurchase.
• Swaps allow parties to meet each other’s needs for a temporary
amount of time and often cost less in fees than separate
transactions.
– For example, suppose Toyota receives $1 million from American sales,
plans to use it to pay its California suppliers in three months, but wants
to invest the money in euro bonds in the meantime. A three-month swap
of dollars into euros may result in lower brokers’ fees than the two spate
transactions.

• Futures contracts: a contract designed by a third party for a
standard amount of foreign currency delivered/received on a
standard date.
– Contracts can be bought and sold in markets, and only the
current owner is obliged to fulfill the contract.

• Options contracts: a contract designed by a third party for a
standard amount of foreign currency delivered/received on or
before a standard date.
– Contracts can be bought and sold in markets.
– A contract gives the owner the option, but not obligation, of
buying or selling currency if the need arises.

The Demand of Currency Deposits (1 of 12)
• What influences the demand of (willingness to buy) deposits
denominated in domestic or foreign currency?
• Factors that influence the return on assets determine the demand
of those assets.

• Rate of return: the percentage change in value that an asset
offers during a time period.
– The annual return for $100 savings deposit with an interest
rate of 2% is $100 × 1.02 = $102, so that the
rate of return 
 $102  $100 
 2%
$100

• Real rate of return: inflation-adjusted rate of return, which
represents the additional amount of goods & services that can
be purchased with earnings from the asset.
– The real rate of return for the above savings deposit when
inflation is 1.5% is 2% − 1.5% = 0.5%. After accounting
for the rise in the prices of goods and services, the asset can
purchase 0.5% more goods and services after 1 year.

• If prices are fixed, the inflation rate is 0% and (nominal) rates of
return = real rates of return.
• Because trading of deposits in different currencies occurs on a
daily basis, we often assume that prices do not change from day
to day.
– A good assumption to make for the short run.

• Risk of holding assets also influences decisions about whether
to buy them.
• Liquidity of an asset, or ease of using the asset to buy goods
and services, also influences the willingness to buy assets.

• But we assume that risk and liquidity of currency
deposits in foreign exchange markets are essentially the same,
regardless of their currency denomination.
– Risk and liquidity are only of secondary importance when
deciding to buy or sell currency deposits.
– Importers and exporters may be concerned about risk and
liquidity, but they make up a small fraction of the market.

• We therefore say that investors are primarily concerned about
the rates of return on currency deposits.
• Rates of return that investors expect to earn are determined by
– interest rates that the assets will earn
– expectations about appreciation or depreciation

• A currency deposit’s interest rate is the amount of a currency
that an individual or institution can earn by lending a unit of
the currency for a year.
• The rate of return for a deposit in domestic currency is the
interest rate that the deposit earns.
• To compare the rate of return on a deposit in domestic
currency with one in foreign currency, consider
– the interest rate for the foreign currency deposit
– the expected rate of appreciation or depreciation of the
foreign currency relative to the domestic currency.

Figure 14.2 Interest Rates on Dollar and
Yen Deposits, 1978–2016
Since dollar and yen interest rates are not measured in comparable terms, they can
move quite differently over time.
Source: Datastream. Three-month interest rates are shown.
• Suppose the interest rate on a dollar deposit is 2%.
• Suppose the interest rate on a euro deposit is 4%.
• Does a euro deposit yield a higher expected rate
of return?
– Suppose today the exchange rate is $1/€1, and the expected
rate one year in the future is $0.97/€1.
– $100 can be exchanged today for €100.
– These €100 will yield €104 after one year.
– These €104 are expected to be worth $0.97/€1 × €104 =
$100.88 in one year.

• The rate of return in terms of dollars from investing in euro deposits
is  $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.
• Note that the expected rate of appreciation of the euro was
$0.97  $1
 0.03  3%.
$1
• We simplify the analysis by saying that the dollar rate of return
on euro deposits approximately equals
– the interest rate on euro deposits
– plus the expected rate of appreciation of euro deposits
– 4% + −3% = 1% ≈ 0.88%
–
E e $ / €  E$ / €
R€ 
E$ / €
• The difference in the rate of return on dollar deposits and euro
deposits is

Table 14.3 Comparing Dollar Rates of
Return on Dollar and Euro Deposits

Model of Foreign Exchange Markets (1 of 6)
• Construct model of foreign exchange markets using:
– the demand of (rate of return on) dollar denominated
deposits
– and the demand of (rate of return on) foreign currency
denominated deposits

• Model in equilibrium when deposits of all currencies offer the
same expected rate of return: interest parity.
– Interest parity implies that deposits in all currencies are
equally desirable assets.
– Interest parity implies that arbitrage in the foreign exchange
market is not possible.
• Interest parity says:
E e $ / €  E$ / €
R$  R€ 
E$ / €

• Why should the interest parity condition hold?
– Suppose it did not. Suppose
E e $ / €  E$ / €
R$  R€ 
E$ / €
– Then no investor would want to hold euro deposits, driving down the
demand and price of euros.
– Then all investors would want to hold dollar deposits, driving up the
demand and price of dollars.
– The dollar would appreciate and the euro would depreciate, increasing
the right side until equality was achieved.

• How do changes in the current exchange rate affect the expected
rate of return of foreign currency deposits?
• Depreciation of the domestic currency today lowers the expected
rate of return on foreign currency deposits.
– When the domestic currency depreciates, the initial cost of
investing in foreign currency deposits increases, thereby
lowering the expected rate of return of foreign currency
deposits.

• Appreciation of the domestic currency today raises the expected
return of deposits on foreign currency deposits.
– When the domestic currency appreciates, the initial cost of
investing in foreign currency deposits decreases, thereby
increasing the expected rate of return of foreign currency
deposits.

Table 14.4 Today’s Dollar/Euro Exchange Rate and
the Expected Dollar Return on Euro Deposits When
Ee$/€ = $1.05 per Euro

Figure 14.3 The Relation between the Current
Dollar/Euro Exchange Rate and the Expected Dollar
Return on Euro Deposits
An appreciation of the dollar against the euro raises the expected return on euro
deposits, measured in terms of dollars.
Figure 14.4 Determination of the
Equilibrium Dollar/Euro Exchange Rate
Equilibrium in the foreign exchange market is at point 1, where the expected

dollar returns on dollar and euro deposits are equal.
• The effects of changing interest rates:
– an increase in the interest rate paid on deposits denominated
in a particular currency will increase the rate of return on
those deposits.
– This leads to an appreciation of the currency.
– Higher interest rates on dollar-denominated assets cause the
dollar to appreciate.
– Higher interest rates on euro-denominated assets cause the
dollar to depreciate.

Figure 14.5 Effect of a Rise in the Dollar
Interest Rate
A rise in the interest rate offered by dollar deposits causes the dollar to
appreciate from point 1 to point 2.
Rectangular hyperbola
Three rectangular hyperbolas y=A/x with the coordinate

axes as asymptotes red: A = 1; purple: A = 4; blue: A = 9

Figure 14.6 Effect of a Rise in the Euro
Interest Rate
A rise in the interest rate paid by euro deposits causes the dollar to depreciate
from point 1 to point 2. (This figure also describes the effect of a rise in the
expected future $/€ exchange rate.)
The Effect of an Expected Appreciation
of the Euro
• If people expect the euro to appreciate in the future, then euro-
denominated assets will pay in valuable euros, so that these
future euros will be able to buy many dollars and many dollar-
denominated goods.
– The expected rate of return on euros therefore increases.
– An expected appreciation of a currency leads to an actual
appreciation (a self-fulfilling prophecy).
– An expected depreciation of a currency leads to an actual
depreciation (a self-fulfilling prophecy).

Figure 14.7 Cumulative Total Investment Return in
Australian Dollar Compared to Japanese Yen, 2003-
2013
The Australian dollar-yen carry trade has been profitable on average but is
subject to sudden large reversals, as in 2008.
Carry trade
• Over much of the 2000s, Japanese Yen interest rates were close to
zero while Australia’s interest rates were positive. It might be
attractive to borrow yen and invest the Australian dollar bonds.
However, such a strategy should not be profitable according to the
‘interest parity’.
• Carry trade: international investors borrow low-interest currencies
and buy high-interest currencies, with results that can be profitable
over long periods.
• Is carry trade evidence that interest parity is wrong?
• Risk and liquidity factors need to be considered
• Investment currencies may experience abrupt crashed

Covered Interest Parity
• Covered interest parity relates interest rates across countries and
the rate of change between forward exchange rates and the spot
exchange rate:
F$ / €  E$ / €
R$  R€ 
E$ / €
where F$/€ is the forward exchange rate.
• It says that rates of return on dollar deposits and “covered”
foreign currency deposits are the same.
– How could you earn a risk-free return in the foreign
exchange markets if covered interest parity did not hold?
– Covered positions using the forward rate involve little risk.

Summary (1 of 5)
1. An exchange rate is the price of one country’s currency in
terms of another country’s currency.
• It enables us to translate different countries’ prices into
comparable terms.

Summary (2 of 5)
2. Depreciation of a currency means that it becomes less valuable
and goods denominated in it are less expensive: exports are
cheaper and imports more expensive.
3. Appreciation of a currency means that it becomes more
valuable and goods denominated in it are more expensive:
exports are more expensive and imports cheaper.

Summary (3 of 5)
4. Commercial and investment banks that invest in deposits of
different currencies dominate the foreign exchange market.
– Expected rates of return are most important in determining
the willingness to hold these deposits.
5. Rates of return on currency deposits in the foreign exchange
market are influenced by interest rates and expected exchange
rates.

Summary (4 of 5)
6. Equilibrium in the foreign exchange market occurs when rates
of returns on deposits in domestic currency and in foreign
currency are equal: interest rate parity.
7. An increase in the interest rate on a currency’s deposit leads to
an increase in its expected rate of return and to an appreciation
of the currency.

Summary (5 of 5)
8. An expected appreciation of a currency leads to an increase in
the expected rate of return for that currency, and leads to an
actual appreciation.
9. Covered interest parity says that rates of return on domestic
currency deposits and “covered” foreign currency deposits
using the forward exchange rate are the same.

Homework 1
• Suppose that U.S. dollar interest rate and the euro

interest rate are the same, 5% per year. What is
the relation between the current equilibrium
dollar/euro exchange rate and its expected future
level? Suppose that expected future exchange rate,
1.5 dollar/euro, remains constant as euro interest
rate rises to 10% per year, what is the new
equilibrium dollar/euro exchange rate?

Homework 2
• Calculate the dollar rates of return on the following

assets.
• 1. a painting whose prices rises from $200,000 to
$250,000 in a year
• 2. 10,000 euro deposit in European Bank in a year
when interest rate on euro is 10% and dollar/euro
exchange rate moves from 1.50 dollar/euro to 1.38
dollar/euro

Homework 3
• Suppose that U.S. dollar interest rate is 5% and

the Korean won interest rate is 6% per year. What
is the current equilibrium won/dollar exchange rate
when its expected future won/dollar exchange rate
is 1500 won/dollar? Suppose that Bank of Korea
decides to decrease the interest rate from 6% to
5% per year and suppose that expected future
exchange rate remains constant. What is the new
equilibrium won/dollar exchange rate? Is there
appreciation or depreciation of Korean won?

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International Economics: Theory and

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

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– How much can be exchanged for one dollar?

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United States United States Dollar - - 1.0612 −0.0082 1.2304 −0.0039

Vietnam Vietnamese Dong 22565.0000 −8.0000 23944.9840 −193.3965 27764.1271 −97.6229

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• A depreciated currency means that imports are more expensive

• An appreciated currency means that imports are less expensive

Exchange rate $/£ 1.25 1.50 1.75

Relative price (pairs of jeans/sweater) 1.39 1.67 1.94

Note: The above calculations assume unchanged money prices of

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Equilibrium in the foreign exchange market is at point 1, where the expected

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Three rectangular hyperbolas y=A/x with the coordinate

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• Risk and liquidity factors need to be considered

• Investment currencies may experience abrupt crashed

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

• Suppose that U.S. dollar interest rate and the euro

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