Week 8 International Capital Markets

Question 1

What is the direct measure to the extent of free capital mobility between countries?
-Name every aspect of this equation

Answer 1

Covered interest rate parity
1+i = (1+i*)F/S

1+i is interest rate in US
1+i* is interest rate in EU
1/S is dollar price of euros
F is contract to move it back

Question 2

What is the forward exchange rate?

Answer 2

When you have invested in europe and you need to change the money back to dollars at the end of the period it is the contract which quotes the prices in which it will be delivered back at.

Question 3

What does covered interest rate parity say?

Answer 3

• That the profit from investing in domestic market must be the same from the profit of investing in iverseas.

Question 4

What is the difference between covered and uncovered interest rate parity?

Answer 4

-Covered is using forward contract so today you will know how many dollars you will get for the euros.

-Uncovered is when you do not know what you will be exchanging it back at after the period. So it is an expectation of the spot price at that point.

Question 5

What is the Uncovered interest rate parity?

Answer 5

(1+i) = (1+i*)E(S2)/S1

Question 6

Are CIRP and UIRP equal?

Answer 6

No! as it is not necessary that forward contract is equaled to expected spot price.

Question 7

What are the ways in the data to see the free capital mobility?

Answer 7

-Interest rate differentials
1982-1988 countries like Swiss and Germany had close to zero
Whilst France and Mexico meant negative as they had capital control

Onshore offshore differentials you could have an account in London denominated in French Francs

Question 7

How do you derive the CIRP

Question 7

Which of CIRP or UIRP does Free capital mobility imply?

Answer 7

Implies CIRP
does not imply UIRP