International Finance
International Finance
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Summaries
Balance of
Payments (BOP) account:
Current account
+ capital account + official reserve account = 0
Current
account: goods, services, investment income,
gifts
Capital
Account: investment principal
Official
Reserve: government holding of foreign currency (Changes of reserve) surplus:
sell domestic currency
Supply of
currency: depreciate => more export less import =>supply quantity reduces
Demand of
currency: depreciate => more export less import => demand quantity increases
Factors
affecting exchange rate (affect both supply and demand curves, oppositely):
- Interest rate differentials
- Expected future exchange rate
Since both
demand and supply are affected by the same factors, even though the exchange
rate can be volatile, the quantity actually exchanged can be stable.
Purchasing
power parity: changes in price in 2 countries should be reflected in the
exchange rate.
Interest
rate parity: exchange rate must change to reflect
the interest rates of countries with identical risks.