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International Financial Management 11 Edition: by Jeff Madura
International Financial Management 11 Edition: by Jeff Madura
11th Edition
by Jeff Madura
1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Relationships among Inflation, Interest Rates
8 and Exchange Rates
Chapter Objectives
Explain the purchasing power parity (PPP) theory and
its implications for exchange rate changes
Compare the PPP theory, the IFE theory, and the theory
of interest rate parity (IRP), which was introduced in
the previous chapter
2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purchasing Power Parity (PPP)
3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Rational Behind Relative PPP Theory
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purchasing Power Parity
e f Ih I f
5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using PPP to Estimate Exchange Rate Effects
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8.1 Summary of Purchasing Power Parity
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
International Fisher Effect (IFE)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using the IFE to Predict Exchange Rate Movements
9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Implications of the International Fisher Effect
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Derivation of the International Fisher Effect
1 ih
ef 1
1 i f
2. Simplified relationship
e f ih i f
12 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8.6 Summary of International Fisher Effect
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 8.7 Illustration of IFE Line (When Exchange Rate
Changes Perfectly Offset Interest Rate Differentials)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Graphic Analysis of the International Fisher Effect
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Graphic Analysis of the International Fisher Effect
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Limitations of the IFE
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Exhibit 8.9 Comparison of the IRP, PPP, and IFE Theories
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SUMMARY
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
SUMMARY (Cont.)
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