Exchange Rates and International Financial Economics: History, Theories, and Practices

306 Pages·2013·4.244 MB·English

by  John N. Kallianiotis (auth.)

ExchangeRates andInternational FinancialEconomics
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Exchange Rates and
International Financial
Economics
History, Theories,
and Practices
by
John N. Kallianiotis
EXCHANGERATESANDINTERNATIONALFINANCIALECONOMICS
Copyright©JohnN.Kallianiotis,2013.
Softcover reprint of the hardcover 1st edition 2013 978-1-137-28322-1
Allrightreserved.
Firstpublishedin2013by
PALGRAVEMACMILLAN®
intheUnitedStates—adivisionofSt.MartinsPressLLC,
175FifthAvenue,NewYork,NY10010.
WherethisbookisdistributedintheUK,Europeandtherestoftheworld,
hisisbyPalgraveMacmillan,adivisionofMacmillanPublishersLimited,
registeredinEngland,companynumber785998,ofHoundmills,
Basingstoke,HampshireRG216XS.
PalgraveMacmillanistheglobalacademicimprintoftheabovecompanies
andhascompaniesandrepresentativesthroughouttheworld.
Palgrave®andMacmillan®areregisteredtrademarksintheUnitedStates,
theUnitedKingdom,Europeandothercountries.
ISBN 978-1-349-44896-8 ISBN 978-1-137-31888-6 (eBook)
DOI 10.1057/9781137318886
LibraryofCongressCataloging-in-PublicationData
Kallianiotis,JohnN.,1951–
Exchangeratesandinternationalfinancialeconomics:history,theories,
andpractices/byJohnN.Kallianiotis.
pagescm
Includesbibliographicalreferencesandindex.
1.Foreignexchangerates.2.Internationalfinance.I.Title.
HG3851.K252013
332.4’5—dc23 2013013236
AcataloguerecordofthebookisavailablefromtheBritishLibrary.
DesignbyNewgenKnowledgeWorks(P)Ltd.,Chennai,India.
Firstedition:October2013
10 9 8 7 6 5 4 3 2 1
ToKaterina(KKKατερ´ıνα)andNicholas(Nικo´λαoς)
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Contents
ListofIllustrations viii
ListofPermissions xi
Preface xiii
Acknowledgments xvii
AbouttheAuthor xix
1 HistoryofExchangeRate 1
2 TheForeignExchangeMarket 51
3 ForeignExchangeRateDetermination 83
4 ExchangeRateForecasting 143
5 ForeignCurrencyDerivatives 181
6 ForeignExchangeRiskandItsManagement 221
Glossary 253
Index 285
Illustrations
Exhibits
1.1 CentralBank(Fed)BalanceSheet 13
1.2 Euro-bankBalanceSheet 21
2.1 Intermarkettriangulararbitrage 72
5.1 Comparisonofcurrencyforwardandfuturesmarkets 183
5.2 Eurofutures,US$/e(CME),e125,000 190
5.3 Currencyswap 192
5.4 Aparallelloanorcreditswap(back-to-backloan) 192
5.5 Currencyoptions 194
5.6 Eurocurrencyoptionsdetail 196
5.7 Currencyfuturesoptions 205
6.1 Matchingcurrencycashflows(financialhedging) 240
6.2 Parallelloanorback-to-backloan 243
6.3 Reinvoicingcenter 245
Figures
3.1 Exchangeratedetermination 84
3.2 Theovershootingmodel(exchangeratedynamics) 90
A3.1 Exchangerateandpolicyrates 131
A3.2 SmoothestimateoftheL-TTrendofthepolicyratesand
exchangerate(Hodrick-PrescottFilter) 131
A3.3 Theimpulseresponsefunctions 135
Graphs
1.1 Determinationofflexibleexchangerate 18
A1.1 UStradeweightedexchangerateindexformajorcurrencies(FC/$) 41
A1.2 ThedepreciationoftheUSdollarwithrespecttogold 41
A2.1 Thetermstructureofinterestrates 76
3.1 Volatilityofthespotexchangerate($/e) 102
A3.1 USdollarvolatilitywithrespecttothemajorcurrencies 137
ILLUSTRATIONS ix
A4.1 Loglineartimetrendofthespotexchangerate(st) 165
A4.2 Therandomwalkofthest anditsforecasting 166
A4.3 ThemovingaverageMA(1)processofst anditsforecasting 168
A4.4 Thetransferfunctionmodel 171
A4.5 Theimpulseresponsefunction 172
A4.6 Theestimateofcurrencybeta 175
5.1 Buyingandsellingacalloptiononeuros(e) 198
5.2 Buyingandsellingaputoptiononeuros(e) 201
5.3 Longandshortcurrencystraddle 208
5.4 Longandshortcurrencystrangle 210
6.1 Hedgingreceivables(comparisonofalternatives) 231
6.2 Hedgingpayables(comparisonofalternatives) 235
Tables
A1.1 Consolidatedstatementoftheconditionofallfederalreserve
banks 36
A1.2 PairwiseGrangercausalitytests 38
A1.3 Lineartrendestimationanditsgraph 39
A1.4 Loglineartrendestimation 40
A1.5 Loglineartrendestimationwithcorrectionoftheserialcorrelation 40
A2.1 CorrelationCoefficientsbetweenexchangerateandinterestrates 74
A2.2 PairwiseGrangercausalitytests 75
A3.1 Spotexchangerates,ratesofreturn,naturallogarithms,and
forwarddiscountsorpremiums 126
A3.2 InvestmentsinUSandEuro-zoneassets:Return,risk,and
returntovariabilityratio(1999:01–2009:11) 127
A3.3 InvestmentsinUSandEuro-zoneassets:Return,risk,and
returntovariabilityratio(1999:01–2001:12) 127
A3.4 InvestmentsinUSandEuro-zoneassets:Return,risk,and
returntovariabilityratio(2002:01–2009:11) 127
A3.5 Statisticsoftheexpectedinterestratesinfinancialassets
(1999:01–2009:11),eqs.(69)and(70) 128
A3.6 Correlationmatrixoftheexpectedreturnsandexchangerate 129
A3.7 PairwiseGrangercausalitytests(1999:01–2009:11) 129
A3.8 Expected(forecasting)interestrates,eq.(3.69),theirrisk,eq.
(3.70),andexpectedreturntovariabilityratio,eq.(3.76) 130
A3.9 EstimationoftheUS/Euro-zonespotexchangerate,eq.(3.83) 133
∗
A3.10 Vectorautoregressionestimates(s,iFFF,iONDF),eq.(3.85)
∗
(exogenousvariables:iFF,iOND) 134
∗
A3.11 Vectorautoregressionestimates(s,iFFF,iONDF)
∗ ∗
(exogenous–ariables:iFF,iOND,g,g ) 136