International Finance For Dummies E-Book

Ayse Evrensel

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 455

Veröffentlichungsjahr: 2013

Beschreibung

Want to get the most out of your International Finance course? Nowadays the value of daily foreign exchange trading is more than one hundred times the value of annual international trade in goods and services. As result of the great importance of international financial transactions, the subject of international finance continues to develop as fast as--or faster than--any other field in economics and finance. International Finance For Dummies sheds light on this increasingly important subject for the growing number of students required to take this course. If you're an undergraduate or MBA student enrolled in an international finance course, this hands-on, friendly guide gives you everything you need to succeed. Plus, it includes up-to-date information on the latest changes to International Finance Reporting Standards, its impact on a company's overall finances, and the various currencies and institutions available worldwide. * Serves as an excellent supplement to your international finance texts * Provides easy-to-understand explanations of complex material * Brings you up-to-speed on the concepts and subject matter you need to know International Finance For Dummies is your ticket to scoring your highest in your international finance course.

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International Finance For Dummies®

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Copyright © 2013 by John Wiley & Sons, Inc., Hoboken, New Jersey

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Library of Congress Control Number: 2013933936

ISBN: 978-1-118-52389-6 (pbk); ISBN 978-1-118-59182-6 (ebk); ISBN 978-1-118-59189-5 (ebk); ISBN 978-1-118-59191-8 (ebk)

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About the Author

Ayse Y. Evrensel holds a PhD from the University of Zurich (Switzerland) in Economic and Social Geography (1984) and a PhD in Economics from Clemson University (1999). As a geographer, she worked at University of Zurich and Clemson University (SC). In geography, her areas of teaching and research focused on international migration, economic development, multilateral organizations, and the European Union.

As an economist, she worked at Ball State University, Portland State University, and University of California San Diego. In Economics, she has taught a wide range of courses such as Macroeconomics, Microeconomics, Econometrics, International Finance, International Trade, and Financial Markets. She has published on the effects of IMF programs, banking regulations, banking crises, preferential trade arrangements, corruption, and the relationship between institutional quality and culture.

Ayse is currently an associate professor of Economics at Southern Illinois University Edwardsville. She lives in Edwardsville, Illinois.

Dedication

I dedicate this book to Myles Wallace, my teacher and dear friend.

Author’s Acknowledgments

I have been teaching International Finance for many years. Over the years, my students have become my teachers, especially when it comes to how to teach the subject. I am deeply grateful for their genuine involvement and contribution to the course.

I could not have had the courage to get involved in this project without David Lutton and Erin Calligan Mooney holding my hand and showing me the ropes at the very beginning of the writing process. I am very appreciative of their support, encouragement, and trust.

I wish I could give everything I write to Linda Brandon for editing because she is such an amazing editor. I hope to have learned one or two things from her about writing. I am grateful to Linda for her patience and professionalism. I also thank Krista Hansing for her involvement in the project.

I am very grateful to technical editors Jerry Dwyer and Allen Brunner for their valuable comments and suggestions.

Publisher’s Acknowledgments

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International Finance For Dummies®

Visit www.dummies.com/cheatsheet/internationalfinance to view this book's cheat sheet.

Table of Contents

Introduction

About This Book

Conventions Used in This Book

What You Are Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: Getting Started with International Finance

Part II: Determining the Exchange Rate

Part III: Understanding Long-Term Concepts and Short-Term Risks

Part IV: Conducting a Background Check: Currency Changes through the Years

Part V: The Part of Tens

Appendix

Icons Used in This Book

Where to Go from Here

Part I: Getting Started with International Finance

Chapter 1: Money Makes the World Go ’Round

Checking Out Definitions and Calculations

What’s an exchange rate?

What do you say when the exchange rate changes?

Who cares about exchange rates?

Finding Out What Determines (Or Changes) Exchange Rates

Which model to use?

Are there any prediction rules to live by?

Getting to the Long and Short of It

What’s the percent change in the exchange rate?

Can anything be done about the risk due to short-term volatility in exchange rates?

Answering Questions about the System: Fixed, Flexible, or Pegged?

Does the type of money matter for the exchange rate?

Which international monetary system is better?

Is the Euro-zone an optimum ­currency area?

Gaining Insight into the Do’s and Don’ts of International Finance

Looking at Finance Globally

Chapter 2: Mastering the Basics of International Finance

Making the Exchange: Exchange Rates

Understanding exchange rates as the price of currencies

Applying relative price to exchange rates

Taking on Different Exchange Rates

Nominal exchange rates

Real exchange rates

Effective exchange rates

Tackling Terminology: Changes in Exchange Rates

Calculating the percent change

Defining appreciation and depreciation

Finding revaluation and devaluation

Grasping Exchange Rate Conversions

Exchange rate as the price of foreign ­currency

Exchange rate as the price of domestic currency

Calculating Cross Rates

Figuring the Bid–Ask Spread

Gaining insight at an international airport

Finding the spread

Chapter 3: Buy, Sell, Risk! Users of Foreign Exchange Markets

Identifying Major Actors in Foreign Exchange Markets

Multinational firms

Speculators

Central banks

Watching Out for Risk

FX risk of an exporting firm

FX risk of an importing firm

FX risk in a domestic company–foreign subsidiary setting

Speculation: Taking a Risk to Gain Profit

When speculation goes right

When speculation goes wrong

Chapter 4: It’s All about Change: Changes in the Exchange Rate

Considering a Visual Approach to Changes in Exchange Rates

Looking at How Macroeconomic Variables Affect Exchange Rates

Output and exchange rates

Inflation rates and exchange rates

Interest rates and exchange rates

Uncovering Hidden Information in Graphs: Exchange Rate Regimes

Defining exchange rate regime

Visualizing exchange rate regimes

Part II: Determining the Exchange Rate

Chapter 5: It’s a Matter of Demand and Supply

Apples per Orange, Euros per Dollar: It’s All the Same

Price and quantity of oranges

Demand and supply in the orange market

Determining Exchange Rates through Supply and Demand

Price and quantity

Factors that affect demand and supply

Predicting Changes in the Euro–Dollar Exchange Rate

Inflation rate

Growth rate

Interest rate

Government interventions

Keeping It Straight: Using a Different Exchange Rate

Chapter 6: Setting Up the Monetary Approach to Balance of Payments

Discovering the MBOP’s Approach to Exchange Rates

Viewing the basic assumptions

Setting the MBOP apart

Explaining the Money Market

Demand for money

Supply of money

Money market equilibrium

Taking On the Foreign Exchange Market

Asset approach to exchange rate ­determination

The expected real returns curve

The other real returns curve

Equilibrium in the foreign exchange market

Changes in the foreign exchange market equilibrium

Combining the Money Market with the Foreign Exchange Market

The combined MBOP

Changes in the exchange rate equilibrium in the combined MBOP

Keeping It Straight: What Happens When You Use a Different Exchange Rate?

Chapter 7: Predicting Changes in Exchange Rates Based on the MBOP

Applying Real Shocks to MBOP

Increase in U.S. output

Increase in Eurozone’s output

Applying Nominal Shocks to MBOP

Short- and long-run effects of a nominal shock — without overshooting

Short- and long-run effects of a nominal shock — with overshooting

Comparing MBOP with and without ­overshooting

Keeping It Straight: What Happens When We Use a Different Exchange Rate?

Effects of a real shock

Effects of a nominal shock

Comparing Predictions of MBOP and the Demand–Supply Model

Part III: Understanding Long-Term Concepts and Short-Term Risks

Chapter 8: Your Best Guess: The Interest Rate Parity (IRP)

Tackling the Basics of Interest Rate Parity (IRP)

Differences between IRP and MBOP

The International Fisher Effect (IFE)

IRP and forward contracts

Working with the IRP

Derivation of the IRP

Calculation of forward discount and ­forward premium

Speculation Using the Covered Interest Arbitrage

Covered versus uncovered interest arbitrage

Covered arbitrage examples

Graphical treatment of arbitrage ­opportunities

Determining Whether the IRP Holds

Empirical evidence on IRP

Factors that interfere with IRP

Chapter 9: Taking a Bite Out of the Purchasing Power Parity (PPP)

Getting a Primer on the Purchasing Power Parity (PPP)

Linking the PPP, the MBOP, the IRP, and the IFE

Figuring the absolute and relative PPP

Working with the PPP

Derivation of the PPP

Application of the PPP

Deciding Whether the PPP Holds

The PPP and the Big Mac Standard

Empirical evidence on the (relative) PPP

Chapter 10: Minimizing the FX Risk: FX Derivatives

Checking Out FX Derivatives

Forward contracts and export–import firms

Futures, options, and speculators

Moving to Forward Contracts

Forward premium or discount

Forward contracts that backfire

Forward contracts that work

Looking at Futures Contracts

Finding arbitrage in FX derivative markets

Marking to market

Just Say “No” to Obligation! Looking at Options

Paying the price for having an option: The option premium

Employing your right to buy: Call options

Applying your right to sell: Put options

Part IV: Conducting a Background Check: Changes in Currency through the Years

Chapter 11: Macroeconomics of Monetary Systems and the Pre-Bretton Woods Era

Reviewing Types of Money through the Ages

Pure commodity standard

Convertible paper money and gold standard

Fiat money

Examining the Relationship between Types of Money and Exchange Rate Regimes

Exchange rates in a commodity standard system

Exchange rates in a fiat money system

Understanding the Macroeconomics of the Metallic Standard

Maintaining internal balance

Maintaining external balance

Checking out the interdependence of macroeconomic conditions

Finding compatibility: The trilemma

Discovering the Monetary System of the Pre–Bretton Woods Era

The bimetallic era (until 1870)

Gold standard of the pre–World War I era (1870–1914)

The interwar years (1918–1939)

Chapter 12: The Bretton Woods Era (1944–1973)

Gaining Insight into the Bretton Woods System

Attending the Bretton Woods Conference in 1944

Lessons learned from the past and new realizations

Clashing ideas at the conference

Judging the Outcome of the Bretton Woods Conference

Setting the reserve currency system

IMF: Manager of fixed exchange rates

Marking the Decline of the Bretton Woods System

Dollar shortage and the Marshall Plan (1947)

Systems getting out of hand (1950s and 1960s)

Nailing the coffin in 1971 (and then again in 1973)

Chapter 13: Exchange Rate Regimes in the Post–Bretton Woods Era

Using Floating Exchange Rates

Advantages and disadvantages of floating exchange rates

Intervention into floating exchange rates

Unilaterally Pegged Exchange Rates

Using hard pegs

Trying soft pegs

Attracting foreign investors with soft pegs

Dealing with Currency Crises and the IMF

Decoding the IMF’s role in the post–Bretton Woods era

Providing stability or creating moral hazard?

Mirror, Mirror: Deciding Which International Monetary System Is Better

Nostalgic about the Bretton Woods system? The case for fixed exchange rates

Don’t like fixed things? The case for flexible exchange rates

Intermediate regimes and overview of alternative exchange rate regimes

Chapter 14: The Euro: A Study in Common Currency

Introducing the Euro

A very brief history of the European Union

Optimum currency area (OCA)

Walking the Stages of European Monetary Integration

European Monetary System (EMS) and the European Monetary Union (EMU)

European System of Central Banks (ESCB) and European Central Bank (ECB)

Getting the Lowdown: Euro’s Report Card

Euro-zone countries

How the euro stands up to other currencies

Accomplishments of the Euro-zone

Challenges of the Euro-zone

Finding What the Future Holds for the Euro

Sovereign debt crisis taking a toll

Pain of political (and fiscal) integration

Part V: The Part of Tens

Chapter 15: Ten Important Points to Remember about International Finance

Catching Up on What a Relative Price Is

Finding Out What Makes a Currency Depreciate

Keeping in Mind That Higher Nominal Interest Rates Imply Higher Inflation Rates

Paying Attention to Interest Rate Differentials When Investing in Foreign Debt Securities

Uncovering the Two Parts of Returns When Investing in Foreign Debt Securities

Adjusting Your Expectations As Information Changes

Appreciating the Size of Foreign Exchange Markets

Using Foreign Exchange Derivatives for the Right Reason

Noting That Going Back to the Gold Standard Means Dealing with Fixed Exchange Rates

Realizing the Value of Policy Coordination in a Common Currency

Chapter 16: Ten Common Myths in International Finance

Expecting to Make Big Bucks Every Time You Speculate in Foreign Exchange Markets

Thinking You Can Buy a Big Mac in Paris at the Same Price as in Your Hometown

Ignoring Policymakers When It Comes to Exchange Rates

Giving Up on Theory Too Easily

Forgetting about High Short-Term Volatility in Exchange Rates

Thinking that All Changes in the Exchange Rate Are Traceable to Changes in Fundamentals

Thinking about Foreign Exchange Markets as Just Another Market

Assuming that Central Bank Interventions Are Meaningless

Thinking that Pegged Exchange Rates Are a Great Idea

Being Nostalgic about the Good Old Gold Standard Days

Appendix: Famous Puzzles in International Finance

Cheat Sheet

Introduction

I understand when people are perplexed about international finance. Been there, done that. But being perplexed about something can be good motivation to understand it. As a noneconomist (and a much younger person), Ihad the privilege of experiencing life in different countries such as Turkey, Brazil, and Switzerland, which greatly affected my career choice later.

Throughout the 1970s, the 1980s, and partly the 1990s, Turkey and Brazil experienced political struggles and economic problems. You could feel it in the streets, and bad news was everywhere in the media. Hyperinflation — annual inflation rates reaching 100 percent in Turkey during the early 1980s and several hundred percent in Brazil until the mid-1990s — was simply stunning. At the same time, these countries’ currencies were depreciating. I sort of understood that part because I experienced it in my everyday life. I needed more of these countries’ currencies to buy one unit of a hard currency such as the dollar, the German mark, or the Swiss franc.

By the way, although I didn’t understand what was going on at that time, both official and unofficial (black market) places existed for buying or selling hard currency. Now I would call it but then, it was just reality. Needless to say, when you sell your hard currency unofficially, you receive a lot more domestic currency than the official place gives you. Also, the International Monetary Fund (IMF) was part of these countries’ daily life then. I understood that, for some reason, the central banks of these countries were losing hard currency. Sometimes they had problems paying imports. The IMF representatives visited these countries and worked out an austerity program in exchange for a large amount of hard currency. Then all newspapers published articles against the IMF and how awful the proposed austerity program was. People held demonstrations in the streets, shouting, “IMF, go home!”