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Brian Butler: TBird int'l finance class 02

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Brian David Butler
Brian David Butler

Series of lectures from Brian Butler, given during fall 2008 session at Thunderbird Global MBA, Miami campus: This lecture 02: learn to use International Fisher effect (IFE), and PPP, Law of one Price, Big Mac index to estimate long term currency (FX) trends

Economy & FinanceBusiness
1 of 41
Contact Information: Brian David Butler Miami Campus Facilitator International Economics & Trade (Prof. Grosse) Email: [email_address] Cell: 786-457-0984 Blog: http://blog.globotrends.com/ Wiki: http://kookyplan.pbwiki.com/brianbutler Connect professionally: http://www.linkedin.com/in/briandbutler http://www.linkedin.com/e/gis/69362 Connect personally: http://www.facebook.com/people/Brian_Butler/293500110
Global MBA International Finance & International Trade GM6212 2 nd session. September 27, 2008 Last Class Now Next… Define: Theories Apply - FX markets -PPP -hedging - Arbitrage -IFE -real life
Review last session: ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Exchange Rate Determination E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
Law of One Price ,[object Object],[object Object],[object Object],[object Object]
Law of One Price ,[object Object],[object Object],[object Object],[object Object]
Law of One Price ,[object Object],[object Object],[object Object],[object Object],[object Object]
Law of One Price ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],10% change
[object Object],[object Object],[object Object],[object Object],[object Object]
Law of One Price ,[object Object],[object Object]
Purchasing Power Parity E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
PPP – purchasing power parity E[XR S ] – XR S XR S PARITY PURCHASING POWER (%  Spot Rate*) (Inflation Differential*) It looks confusing, but is simple. PPP states that … % change in spot rate = inflation differential That’s all.
Purchasing Power Parity ,[object Object],[object Object],[object Object]
Purchasing Power Parity ,[object Object],[object Object]
PPP- example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
PPP ,[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Problems with PPP ,[object Object],[object Object],[object Object],[object Object]
Problems with PPP ,[object Object],[object Object],[object Object],[object Object]
Big Mac Index ,[object Object],[object Object],[object Object],[object Object]
Big Mac Index
Big Mac Index ,[object Object],[object Object],[object Object],[object Object],[object Object]
Big Mac Index ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Big Mac Index ,[object Object],[object Object],[object Object],[object Object],[object Object]
Big Mac Index ,[object Object],[object Object]
Exchange Rate Determination E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
IFE E[XR S ] – XR S XR S IFE INT’L FISHER EFFECT (Interest Differential) (%  Spot Rate*) Looks confusing, but is simple. IFE states that … % change in spot rate = interest differential That’s all.
IFE ,[object Object],[object Object],[object Object],[object Object],[object Object]
IFE - example ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Crisis timeline ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Crisis – key points ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Crisis – how it relates to our class? ,[object Object],[object Object],[object Object],[object Object]
Credit Crisis – how it relates to our class? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Crisis – how it relates to our class? ,[object Object],[object Object],[object Object],[object Object]
Near collapse – Last Thursday 9/18/08 ,[object Object],[object Object],[object Object],[object Object]
Fed to the rescue ,[object Object],[object Object],[object Object],[object Object]
But the problems continue… ,[object Object]

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Brian Butler: TBird int'l finance class 02

  • 1. Contact Information: Brian David Butler Miami Campus Facilitator International Economics & Trade (Prof. Grosse) Email: [email_address] Cell: 786-457-0984 Blog: http://blog.globotrends.com/ Wiki: http://kookyplan.pbwiki.com/brianbutler Connect professionally: http://www.linkedin.com/in/briandbutler http://www.linkedin.com/e/gis/69362 Connect personally: http://www.facebook.com/people/Brian_Butler/293500110
  • 2. Global MBA International Finance & International Trade GM6212 2 nd session. September 27, 2008 Last Class Now Next… Define: Theories Apply - FX markets -PPP -hedging - Arbitrage -IFE -real life
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  • 5. Exchange Rate Determination E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
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  • 13. Purchasing Power Parity E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
  • 14. PPP – purchasing power parity E[XR S ] – XR S XR S PARITY PURCHASING POWER (%  Spot Rate*) (Inflation Differential*) It looks confusing, but is simple. PPP states that … % change in spot rate = inflation differential That’s all.
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  • 28. Exchange Rate Determination E[XR S ] – XR S XR S UFR UNBIASED FORWARD RATE IFE INT’L FISHER EFFECT INTEREST RATE PARITY IRP PARITY PURCHASING POWER (Forward Premium) (Interest Differential) FISHER EFFECT FE (%  Spot Rate*) (Inflation Differential*) THIS MODEL IGNORES GOVERNMENT CONTROLS AND TRANSACTIONS COSTS * = Forecasted Value XR = Domestic Currency Foreign Currency
  • 29. IFE E[XR S ] – XR S XR S IFE INT’L FISHER EFFECT (Interest Differential) (%  Spot Rate*) Looks confusing, but is simple. IFE states that … % change in spot rate = interest differential That’s all.
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