Professional Documents
Culture Documents
Chapter Objectives
Annual Changes
in the Value of the Euro
Date
1/1/2000
1/1/2001
1/1/2002
1/1/2003
1/1/2004
Exchange Rate
$1.001/
$.94/
$.89/
$1.05/
$1.26/
Annual %
6.1%
5.3%
+18.0%
+20.0%
r1
r0
S1
S0
D1
D0
Quantity of
U.S. inflation
U.S. demand for
British goods, and
hence .
British desire for U.S.
goods, and hence the
supply of .
S0
S1
D0
D1
Quantity of
interest
rate
Country A
Country B comment
1%
1%
1%
1%
We choose
investments in each
country that have
low risk
= Real rate
2%
2%
+ inflation
4%
2%
Different economic
policies are
inevitable
7%
5%
Time
preference
+ Risk
= interest rate
The difference in
inflation rates
explains the
difference in interest
rates!
S0 ,S1
D1
D0
Quantity of
For use with International Financial Management, 3e
Jeff Madura and Roland Fox 9781408079812
Cengage Learning EMEA 2014
Interaction of Factors
Exchange
rate
between
foreign
currency
and the
dollar
Speculating on
Anticipated Exchange Rates
Many commercial banks attempt to capitalize on
their forecasts of anticipated exchange rate
movements in the foreign exchange market.
The potential returns from foreign currency
speculation are high for banks that have large
borrowing capacity.
The simple strategy is to get out of the currency
about to depreciate and into the currency that is
going to appreciate against it. Then reverse the
positions after the event to end up with more
than you started with.
For use with International Financial Management, 3e
Jeff Madura and Roland Fox 9781408079812
Cengage Learning EMEA 2014
4. Holds
21,831,543
Repays 20,120,000
A profit of 21,831,543 Exchange at
20,120,000 = 1,711,543 0.38/NZ$
Lends at 6.48%
for 30 days
3. Receives
NZ$57,451,428
1. Borrows
NZ$40 million
Exchange at
0.50 euros/NZ$
2. Holds
20 m euros
Borrows at 6.96%
for 30 days
Returns NZ$40,232,000
Profit of NZ$1,668,000
or 800,640 euros
Lends at 6.72%
for 30 days
4. Holds
NZ$41,900,000
Exchange at
0.48 euros/NZ$
3. Receives
20,112,000 euros
Speculating on
Anticipated Exchange Rates
Between 2 currencies borrow in the weaker