# 1. Explain why the theory of purchasing power parity is often referred to as the law of one price.

Save this PDF as:

Size: px
Start display at page:

Download "1. Explain why the theory of purchasing power parity is often referred to as the law of one price."

## Transcription

1 Chaper Review Quesions. xplain why he heory of purchasing power pariy is ofen referred o as he law of one price. urchasing ower ariy () is referred o as he law of one price because he deerminaion of he exchange rae implies ha similar radable goods cos he same regardless of where hey are purchased. If he price of domesic and foreign radable goods were and * respecively, hen he cos of foreign goods in domesic currency erms would be * where is he nominal exchange rae. The law of one price hus saes ha exchange raes are deermined so ha = *. is upheld by arbirage in he goods marke which acs o close any inernaional price differences (arbirage is he simulaneous ac of selling he good where i is expensive and buying i where i is cheap- making a riskless rading profi- hese rades hough enac price changes ha close he arbirage opporuniy). Therefore deviaions from he law of one price can only exis emporarily. a b = d c A poin a: >, so domesic goods are cheaper han foreign goods. There are hree possible pahs ha can resore he law of one price. a o b: increased demand for domesic goods raises prices o (price adjusmen), = *. a o c: increased relaive demand for serling o purchase cheaper domesic goods sees an exchange rae appreciaion o (exchange rae adjusmen) so ha = *. a o d: a mixure of boh price and exchange rae adjusmens.

2 = b d c a Alernaively, consider he case where a poin a, < domesic prices are higher han hose overseas in erms of he same currency. There are again hree pahs ha can resore he law of one price. a o c: falling demand for domesic goods reduces prices o (price adjusmen), so ha = *. a o b: Falling demand for serling o purchase domesic goods sees a depreciaion of he domesic currency o depreciaion (exchange rae adjusmen), = *. a o d: a mixure of boh price and exchange rae adjusmens xchange rae adjusmen is normally considered o be sronger han price adjusmen. This is primarily because inernaional currency markes are more compeiive han domesic goods markes, so prices respond much faser o changes in demand. The law of one price also esablishes ha he real exchange rae (R) is consan in he long run. I.e. if = *, hen R = * / =.. According o wha would happen o he exchange rae under he following circumsances. a. An increase in he overseas money supply If he quaniy heory of money holds rue hen changes in he money supply have a direcly proporional impac on he price level. % Δ M = % Δ

3 According o he heory of he exchange rae is deermined so ha =. * Hence: % Δ % Δ % Δ, his is he relaive condiion. The domesic exchange will appreciae in roughly he same proporion as he overseas increase in he money supply. % ΔM = % Δ = % Δ b. A reducion in he margins on domesic goods prices If domesic prices are se as a mark up over domesic marginal coss, = ( + μ)mc hen changes in his margin will have a direc impac on he domesic price level. Given ha he exchange rae is defined by he raio of domesic and overseas price levels = hen % Δ = % Δ. The domesic exchange rae will again appreciae. c. Wha would happen o he real exchange rae in each insance? The real exchange rae is defined as he raio of foreign o domesic prices when boh are expressed in he same currency: R = Therefore, he change in he real exchange rae can be approximaed as follows: ΔR Δ Δ Δ + R In par a. he increase in foreign prices is offse by an appreciaion in he exchange rae leaving he real exchange rae unchanged. Δ Δ = Δ Δ + = 0 ΔR hence = 0, R

4 In par b, he fall in domesic prices is offse by a nominal appreciaion, again leaving he exchange rae unchanged. Δ Δ = Δ Δ = 0 ΔR hence = 0 R This confirms ha heory predics a consan long run real exchange rae. 3. The domesic ineres rae falls, so ha i sands 3% below he overseas ineres rae. This ineres differenial is expeced o remain for one year. According o he heory of uncovered ineres pariy, wha would be he effec on he domesic exchange rae? The effec of a emporary 3% ineres differenial ( r r 3% ) = on he pah of he exchange rae can be shown using demand and supply analysis. Iniially foreign bonds offer higher ineres raes. Therefore, domesic consumers swich o foreign bonds and foreign invesors repariae funds. As a resul he demand for foreign currency rises and he supply of foreign currency falls. S S D D Q The domesic currency hen depreciaes ( ) relaive o domesic currency rises. - i.e. he price of foreign currency

5 In one year s ime he ineres differenial disappears. The rise in domesic ineres raes reverses he demand and supply shifs seen before and as a resul he exchange rae reurns o is original posiion. How much is he iniial depreciaion? The answer is 3% due o uncovered ineres pariy (UI). The reurns from holding foreign asses consis of he ineres hey pay plus he capial gains or losses made when convering hese gains back ino domesic currency. The capial gains/losses arise from a depreciaion/appreciaion in he domesic currency whils he invesor held foreign asses. If he depreciaion is greaer han 3%, say 4%, hen he reurn on foreign bonds relaive o domesic bonds is 3% - 4% = -%. In his case i pays o swich back ino he domesic currency so i appreciaes. If depreciaion is less han 3%, say %, hen excess reurn on foreign bonds are 3%- % =%. As a resul he domesic currency depreciaes furher because invesors sill face a posiive incenive o swich from domesic o foreign asses. Only if here is a depreciaion of 3% is here no pressure for he exchange rae o change furher. The movemen in he exchange rae acs o equalise he reurns on financial asses regardless of which currency hey are expressed in. Because financial markes are considered o be large and compeiive, arbirage ensures ha UI holds in he shor run. Oherwise unexploied arbirage opporuniies will exis. e Δ Therefore, = r r, he expeced change in he ineres rae is equal o he difference beween domesic and foreign ineres raes. r r ime

6 Wha if? a) If he ineres differenial was 6% Quie simply he iniial depreciaion of he domesic currency would be 6%. From UI, he expeced change in he exchange rae would be a 6% appreciaion. Δ e * = r r, hence for a 6% appreciaion o exis here mus be an iniial 6% depreciaion. r r ime b) he 3% ineres differenial lased for years This would also produce an iniial depreciaion of approximaely 6%. This is because UI holds in each period. Therefore, for he firs year a 3% ineres differenial creaes an expecaion of a 3% appreciaion. The same will siuaion will occur in he second period. Therefore, over he cause of wo years foreign bonds will pay roughly 6% more in ineres, bu he 6% appreciaion in he domesic exchange rae over he same period creaes capial losses equal o his ineres rae premium. If he iniial exchange rae depreciaion was less han 6%, hen he expeced appreciaion would be less han 6% and hence he capial losses from holding foreign bonds would no offse he ineres rae premium. Consequenly i would be profiable o swich from domesic o foreign bonds which would lead o an exchange rae depreciaion. If he iniial depreciaion were greaer han 7%, hen capial losses from holding foreign bonds exceed he ineres rae gain. There is a movemen ino domesic bonds

7 and he exchange rae appreciaes. Only a an iniial depreciaion of 6% does he currency marke remain in equilibrium. r r 3 ime c) There was a 5% risk premium aached o domesic bonds * From UI you migh deduce ha r r = 5%, hence he domesic exchange rae will appreciae by 5%. However, he 5% premium on domesic bonds simply represens he compensaion for holding riskier asses- perhaps because he risk of defaul is greaer. Therefore, in risk-adjused erms ineres raes remain he same as he overseas rae, so here would be no movemen in he exchange rae. Δ % Δ = = r μ r = 0 if r * r = 5% bu he risk premium 5% μ =. 4. In he Financial Times, you noice ha ineres raes in he UK are 6 percen, whereas in he US hey are currenly only 3 percen. A friend has proposed a ge rich quick scheme where you borrow from he US banks and reinves in UK banks, and make a profi on he difference in ineres raes. Is his plan likely o work? According o he predicions of uncovered ineres pariy (UI) his won work. In order o exercise his plan i is necessary o borrow from he US bank in US dollars and conver he funds ino Briish pounds in order o deposi hem in UK banks. This ransacion will lead o a change in he exchange rae ha will offse he ineres differenial. * According o UI, over he period in which r r = 3% he US dollar will appreciae by 3% relaive o he Briish pound. Therefore, paying back he US dollar loan will require 3% more Briish pounds- compleely offseing he ineres premium. As soon

9 - Absorpion effecs: a rise in ne expors raises domesic income, some of which is hen spen on impors. - ricing o marke: firms may aler he mark up on heir producs o preven exchange raes from alering heir prices in inernaional markes. - Real wage resisance: an increase in impor prices raises he overall price level in he economy and reduces he real wage of households. If workers push for higher nominal wages o mainain he value of he real wage, hen his will feed hrough ino he prices of domesic goods alering he inernaional erms of rade. More advanced problems 6. urchasing power pariy () is a long run heory of he exchange rae Discuss. There are various poins o make: The law of one price is driven by arbirage in he good marke- his however is relian on households successfully searching for he cheapes goods prices. Because his search akes ime- i is likely ha deviaions from he law of one price migh be persisen. The evidence ends o sugges ha in he shor run exchange raes are more volaile han prices- whereas heory argues ha hey should share a common variance. I herefore appears o be he case ha shor run exchange raes reac o more han jus relaive prices. The Dornbusch model of overshooing is one possible explanaion (see he response o quesion 7 below). This model is consisen wih holding in he long run, bu in he shor run exchange raes are driven by uncovered ineres pariy (UI). Given ha financial markes are likely o be larger, more liquid and more compeiive, i is easy o jusify ha UI will have more validiy as a model of exchange rae deerminaion in he shor run. 7. Wha facors accoun for high exchange rae volailiy in he shor run? mpirical evidence suggess ha in he shor run exchange raes are more volaile han prices. One explanaion, according o he Dornbusch overshooing model, is ha exchange raes over-reac o changes in he money supply when prices are rigid. The Dornbusch model works by exploring he ineracion beween he UI and heories of exchange rae deerminaion. If here is an increase in he money supply hen from he Quaniy Theory of Money here is a proporional change in he price level. % Δ M = % Δ. In his case here is no change in he real money supply and ineres raes remain consan:

10 M M =, 0 Δr = r ( M ) M s ( M ) M s r r M D, ( r Y ) M d, M s Then according o, % Δ = % Δ, hence prices and exchange raes exhibi he same degree of volailiy. However, suppose ha in he shor run prices adjus slowly so ha he Quaniy Theory of Money does no hold. % Δ M > % Δ As a resul a nominal expansion in he money supply also leads o a real expansion, puing downward pressure on equilibrium ineres raes in he money marke. M M <, Δ r = r r < 0 From UI, here is now an expecaion of exchange rae appreciaion % Δ e = r r. In he long run hough prices are assumed o fully adjus, so he real money supply will fall, ineres raes rise, and he exchange rae will depreciae in view of he higher price level and he predicions of. When prices adjus slowly, he ineracion of UI and hough creaes a siuaion where an expansion in he money supply leads o a shor run expecaion of appreciaion, bu a long run depreciaion. The only way hese wo faces can be

11 reconciled is if he exchange rae over depreciaes is long run level in he shor run. Therefore, % Δ < % Δ as he empirical evidence indicaes. M r M r M r (A) (C) 0 0 O (B) (D) 0 0 Anoher reason why exchange raes over shor horizons may be volaile is because of he linkage beween currency markes and equiy markes. Ineres bearing bonds are no he only financial asses ha invesors can purchase. However, because equiy prices are far more volaile han bond yields, some of he observed volailiy in financial markes may be ransmied ino exchange raes.

### 4. International Parity Conditions

4. Inernaional ariy ondiions 4.1 urchasing ower ariy he urchasing ower ariy ( heory is one of he early heories of exchange rae deerminaion. his heory is based on he concep ha he demand for a counry's currency

### Lecture Note on the Real Exchange Rate

Lecure Noe on he Real Exchange Rae Barry W. Ickes Fall 2004 0.1 Inroducion The real exchange rae is he criical variable (along wih he rae of ineres) in deermining he capial accoun. As we shall see, his

### What is a swap? A swap is a contract between two counter-parties who agree to exchange a stream of payments over an agreed period of several years.

Currency swaps Wha is a swap? A swap is a conrac beween wo couner-paries who agree o exchange a sream of paymens over an agreed period of several years. Types of swap equiy swaps (or equiy-index-linked

### Chapter 7. Response of First-Order RL and RC Circuits

Chaper 7. esponse of Firs-Order L and C Circuis 7.1. The Naural esponse of an L Circui 7.2. The Naural esponse of an C Circui 7.3. The ep esponse of L and C Circuis 7.4. A General oluion for ep and Naural

### 11/6/2013. Chapter 14: Dynamic AD-AS. Introduction. Introduction. Keeping track of time. The model s elements

Inroducion Chaper 14: Dynamic D-S dynamic model of aggregae and aggregae supply gives us more insigh ino how he economy works in he shor run. I is a simplified version of a DSGE model, used in cuing-edge

### Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is \$613.

Graduae School of Business Adminisraion Universiy of Virginia UVA-F-38 Duraion and Convexiy he price of a bond is a funcion of he promised paymens and he marke required rae of reurn. Since he promised

### CRISES AND THE FLEXIBLE PRICE MONETARY MODEL. Sarantis Kalyvitis

CRISES AND THE FLEXIBLE PRICE MONETARY MODEL Saranis Kalyviis Currency Crises In fixed exchange rae regimes, counries rarely abandon he regime volunarily. In mos cases, raders (or speculaors) exchange

### CHARGE AND DISCHARGE OF A CAPACITOR

REFERENCES RC Circuis: Elecrical Insrumens: Mos Inroducory Physics exs (e.g. A. Halliday and Resnick, Physics ; M. Sernheim and J. Kane, General Physics.) This Laboraory Manual: Commonly Used Insrumens:

### BALANCE OF PAYMENTS. First quarter 2008. Balance of payments

BALANCE OF PAYMENTS DATE: 2008-05-30 PUBLISHER: Balance of Paymens and Financial Markes (BFM) Lena Finn + 46 8 506 944 09, lena.finn@scb.se Camilla Bergeling +46 8 506 942 06, camilla.bergeling@scb.se

### PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE

Profi Tes Modelling in Life Assurance Using Spreadshees PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE Erik Alm Peer Millingon 2004 Profi Tes Modelling in Life Assurance Using Spreadshees

### The Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas

The Greek financial crisis: growing imbalances and sovereign spreads Heaher D. Gibson, Sephan G. Hall and George S. Tavlas The enry The enry of Greece ino he Eurozone in 2001 produced a dividend in he

### Economics Honors Exam 2008 Solutions Question 5

Economics Honors Exam 2008 Soluions Quesion 5 (a) (2 poins) Oupu can be decomposed as Y = C + I + G. And we can solve for i by subsiuing in equaions given in he quesion, Y = C + I + G = c 0 + c Y D + I

### Diagnostic Examination

Diagnosic Examinaion TOPIC XV: ENGINEERING ECONOMICS TIME LIMIT: 45 MINUTES 1. Approximaely how many years will i ake o double an invesmen a a 6% effecive annual rae? (A) 10 yr (B) 12 yr (C) 15 yr (D)

### Table of contents Chapter 1 Interest rates and factors Chapter 2 Level annuities Chapter 3 Varying annuities

Table of conens Chaper 1 Ineres raes and facors 1 1.1 Ineres 2 1.2 Simple ineres 4 1.3 Compound ineres 6 1.4 Accumulaed value 10 1.5 Presen value 11 1.6 Rae of discoun 13 1.7 Consan force of ineres 17

### Chapter 8: Regression with Lagged Explanatory Variables

Chaper 8: Regression wih Lagged Explanaory Variables Time series daa: Y for =1,..,T End goal: Regression model relaing a dependen variable o explanaory variables. Wih ime series new issues arise: 1. One

### A Mathematical Description of MOSFET Behavior

10/19/004 A Mahemaical Descripion of MOSFET Behavior.doc 1/8 A Mahemaical Descripion of MOSFET Behavior Q: We ve learned an awful lo abou enhancemen MOSFETs, bu we sill have ye o esablished a mahemaical

### Morningstar Investor Return

Morningsar Invesor Reurn Morningsar Mehodology Paper Augus 31, 2010 2010 Morningsar, Inc. All righs reserved. The informaion in his documen is he propery of Morningsar, Inc. Reproducion or ranscripion

### Chapter 9 Bond Prices and Yield

Chaper 9 Bond Prices and Yield Deb Classes: Paymen ype A securiy obligaing issuer o pay ineress and principal o he holder on specified daes, Coupon rae or ineres rae, e.g. 4%, 5 3/4%, ec. Face, par value

### Hedging with Forwards and Futures

Hedging wih orwards and uures Hedging in mos cases is sraighforward. You plan o buy 10,000 barrels of oil in six monhs and you wish o eliminae he price risk. If you ake he buy-side of a forward/fuures

### Revisions to Nonfarm Payroll Employment: 1964 to 2011

Revisions o Nonfarm Payroll Employmen: 1964 o 2011 Tom Sark December 2011 Summary Over recen monhs, he Bureau of Labor Saisics (BLS) has revised upward is iniial esimaes of he monhly change in nonfarm

LEASNG VERSUSBUYNG Conribued by James D. Blum and LeRoy D. Brooks Assisan Professors of Business Adminisraion Deparmen of Business Adminisraion Universiy of Delaware Newark, Delaware The auhors discuss

### RC (Resistor-Capacitor) Circuits. AP Physics C

(Resisor-Capacior Circuis AP Physics C Circui Iniial Condiions An circui is one where you have a capacior and resisor in he same circui. Suppose we have he following circui: Iniially, he capacior is UNCHARGED

### A Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation

A Noe on Using he Svensson procedure o esimae he risk free rae in corporae valuaion By Sven Arnold, Alexander Lahmann and Bernhard Schwezler Ocober 2011 1. The risk free ineres rae in corporae valuaion

### Cointegration: The Engle and Granger approach

Coinegraion: The Engle and Granger approach Inroducion Generally one would find mos of he economic variables o be non-saionary I(1) variables. Hence, any equilibrium heories ha involve hese variables require

### NBER WORKING PAPER SERIES IS THE U.S. CURRENT ACCOUNT DEFICIT SUSTAINABLE? AND IF NOT, HOW COSTLY IS ADJUSTMENT LIKELY TO BE?

NBER WORKING PAPER SERIES IS THE U.S. CURRENT ACCOUNT DEFICIT SUSTAINABLE? AND IF NOT, HOW COSTLY IS ADJUSTMENT LIKELY TO BE? Sebasian Edwards Working Paper 11541 hp://www.nber.org/papers/w11541 NATIONAL

### The Interest Rate Risk of Mortgage Loan Portfolio of Banks

The Ineres Rae Risk of Morgage Loan Porfolio of Banks A Case Sudy of he Hong Kong Marke Jim Wong Hong Kong Moneary Auhoriy Paper presened a he Exper Forum on Advanced Techniques on Sress Tesing: Applicaions

### SPECIAL REPORT May 4, Shifting Drivers of Inflation Canada versus the U.S.

Paul Ferley Assisan Chief Economis 416-974-7231 paul.ferley@rbc.com Nahan Janzen Economis 416-974-0579 nahan.janzen@rbc.com SPECIAL REPORT May 4, 2010 Shifing Drivers of Inflaion Canada versus he U.S.

### I. Basic Concepts (Ch. 1-4)

(Ch. 1-4) A. Real vs. Financial Asses (Ch 1.2) Real asses (buildings, machinery, ec.) appear on he asse side of he balance shee. Financial asses (bonds, socks) appear on boh sides of he balance shee. Creaing

### Markit Excess Return Credit Indices Guide for price based indices

Marki Excess Reurn Credi Indices Guide for price based indices Sepember 2011 Marki Excess Reurn Credi Indices Guide for price based indices Conens Inroducion...3 Index Calculaion Mehodology...4 Semi-annual

### MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR

MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR The firs experimenal publicaion, which summarised pas and expeced fuure developmen of basic economic indicaors, was published by he Minisry

### July 27, 2007. only due to developments in the USA but is also the upshot of investment decisions in the surplus countries.

Inernaional opics Curren Issues July 7, 7 US curren accoun defici: No reason o panic! Las year he US curren accoun closed wih a record defici of USD 811 bn or 6.1% of GDP. In 1991 i had sill been in balance.

### Chapter 6: Business Valuation (Income Approach)

Chaper 6: Business Valuaion (Income Approach) Cash flow deerminaion is one of he mos criical elemens o a business valuaion. Everyhing may be secondary. If cash flow is high, hen he value is high; if he

### 9. Capacitor and Resistor Circuits

ElecronicsLab9.nb 1 9. Capacior and Resisor Circuis Inroducion hus far we have consider resisors in various combinaions wih a power supply or baery which provide a consan volage source or direc curren

### Chapter 2 Kinematics in One Dimension

Chaper Kinemaics in One Dimension Chaper DESCRIBING MOTION:KINEMATICS IN ONE DIMENSION PREVIEW Kinemaics is he sudy of how hings moe how far (disance and displacemen), how fas (speed and elociy), and how

### Part 1: White Noise and Moving Average Models

Chaper 3: Forecasing From Time Series Models Par 1: Whie Noise and Moving Average Models Saionariy In his chaper, we sudy models for saionary ime series. A ime series is saionary if is underlying saisical

### Explaining the NZ-Australian exchange rate occasional paper

Wespac \$ Insiuional Bank April 2002 Explaining he NZ-Ausralian exchange rae occasional paper Paul Conway and Richard Franulovich Wespac Insiuional Bank PO Box 691 Wellingon New Zealand Phone (644) 381-1414

### Market Movements and Investors Reaction to Earnings News

Marke Movemens and Invesors Reacion o Earnings News by Vishaal Baulkaran Faculy of Managemen Universiy of Lehbridge Lehbridge, AB, Canada TK 3M4 Phone: (403) 329-2074, Fax: (403) 329-2038 E-mail: vishaal.baulkaran@uleh.ca

### Measuring the Effects of Exchange Rate Changes on Investment. in Australian Manufacturing Industry

Measuring he Effecs of Exchange Rae Changes on Invesmen in Ausralian Manufacuring Indusry Robyn Swif Economics and Business Saisics Deparmen of Accouning, Finance and Economics Griffih Universiy Nahan

### Present Value Methodology

Presen Value Mehodology Econ 422 Invesmen, Capial & Finance Universiy of Washingon Eric Zivo Las updaed: April 11, 2010 Presen Value Concep Wealh in Fisher Model: W = Y 0 + Y 1 /(1+r) The consumer/producer

### Journal Of Business & Economics Research Volume 1, Number 11

Profis From Buying Losers And Selling Winners In The London Sock Exchange Anonios Anoniou (E-mail: anonios.anoniou@durham.ac.ak), Universiy of Durham, UK Emilios C. Galariois (E-mail: emilios.galariois@dirham.ac.uk),

### Pricing Single Name Credit Derivatives

Pricing Single Name Credi Derivaives Vladimir Finkelsein 7h Annual CAP Workshop on Mahemaical Finance Columbia Universiy, New York December 1, 2 Ouline Realiies of he CDS marke Pricing Credi Defaul Swaps

### AP Calculus BC 2010 Scoring Guidelines

AP Calculus BC Scoring Guidelines The College Board The College Board is a no-for-profi membership associaion whose mission is o connec sudens o college success and opporuniy. Founded in, he College Board

### Equities: Positions and Portfolio Returns

Foundaions of Finance: Equiies: osiions and orfolio Reurns rof. Alex Shapiro Lecure oes 4b Equiies: osiions and orfolio Reurns I. Readings and Suggesed racice roblems II. Sock Transacions Involving Credi

### Real Exchange Rates. Menzie D. Chinn. University of Wisconsin, Madison and National Bureau of Economic Research. February 4, 2006

Real Exchange Raes Menzie D. Chinn Universiy of Wisconsin, Madison and Naional Bureau of Economic Research February 4, 2006 Acknowledgmens: Enry prepared for New Palgrave Dicionary. Seven Durlauf and Lawrence

### Entropy: From the Boltzmann equation to the Maxwell Boltzmann distribution

Enropy: From he Bolzmann equaion o he Maxwell Bolzmann disribuion A formula o relae enropy o probabiliy Ofen i is a lo more useful o hink abou enropy in erms of he probabiliy wih which differen saes are

### Capital budgeting techniques

Capial budgeing echniques A reading prepared by Pamela Peerson Drake O U T L I N E 1. Inroducion 2. Evaluaion echniques 3. Comparing echniques 4. Capial budgeing in pracice 5. Summary 1. Inroducion The

### Graduate Macro Theory II: Notes on Neoclassical Growth Model

Graduae Macro Theory II: Noes on Neoclassical Growh Model Eric Sims Universiy of Nore Dame Spring 2011 1 Basic Neoclassical Growh Model The economy is populaed by a large number of infiniely lived agens.

### A Further Examination of Insurance Pricing and Underwriting Cycles

A Furher Examinaion of Insurance ricing and Underwriing Cycles AFIR Conference, Sepember 2005, Zurich, Swizerland Chris K. Madsen, GE Insurance Soluions, Copenhagen, Denmark Svend Haasrup, GE Insurance

### cooking trajectory boiling water B (t) microwave 0 2 4 6 8 101214161820 time t (mins)

Alligaor egg wih calculus We have a large alligaor egg jus ou of he fridge (1 ) which we need o hea o 9. Now here are wo accepable mehods for heaing alligaor eggs, one is o immerse hem in boiling waer

### Can Individual Investors Use Technical Trading Rules to Beat the Asian Markets?

Can Individual Invesors Use Technical Trading Rules o Bea he Asian Markes? INTRODUCTION In radiional ess of he weak-form of he Efficien Markes Hypohesis, price reurn differences are found o be insufficien

### Chapter 2: Principles of steady-state converter analysis

Chaper 2 Principles of Seady-Sae Converer Analysis 2.1. Inroducion 2.2. Inducor vol-second balance, capacior charge balance, and he small ripple approximaion 2.3. Boos converer example 2.4. Cuk converer

### Using RCtime to Measure Resistance

Basic Express Applicaion Noe Using RCime o Measure Resisance Inroducion One common use for I/O pins is o measure he analog value of a variable resisance. Alhough a buil-in ADC (Analog o Digial Converer)

### Module 4. Single-phase AC circuits. Version 2 EE IIT, Kharagpur

Module 4 Single-phase A circuis ersion EE T, Kharagpur esson 5 Soluion of urren in A Series and Parallel ircuis ersion EE T, Kharagpur n he las lesson, wo poins were described:. How o solve for he impedance,

### Chapter 1.6 Financial Management

Chaper 1.6 Financial Managemen Par I: Objecive ype quesions and answers 1. Simple pay back period is equal o: a) Raio of Firs cos/ne yearly savings b) Raio of Annual gross cash flow/capial cos n c) = (1

### Exchange Rates, Equity Prices and Capital Flows

Exchange Raes, Equiy Prices and Capial Flows Forhcoming in he Review of Financial Sudies Harald Hau INSEAD and CEPR Hélène Rey Princeon Universiy, CEPR and NBER Ocober 2004 Absrac We develop an equilibrium

### II.1. Debt reduction and fiscal multipliers. dbt da dpbal da dg. bal

Quarerly Repor on he Euro Area 3/202 II.. Deb reducion and fiscal mulipliers The deerioraion of public finances in he firs years of he crisis has led mos Member Saes o adop sizeable consolidaion packages.

### New facts in finance. John H. Cochrane

New facs in finance John H. Cochrane Inroducion and summary The las 15 years have seen a revoluion in he way financial economiss undersand he invesmen world. We once hough ha sock and bond reurns were

### Price elasticity of demand for crude oil: estimates for 23 countries

Price elasiciy of demand for crude oil: esimaes for 23 counries John C.B. Cooper Absrac This paper uses a muliple regression model derived from an adapaion of Nerlove s parial adjusmen model o esimae boh

### Chabot College Physics Lab RC Circuits Scott Hildreth

Chabo College Physics Lab Circuis Sco Hildreh Goals: Coninue o advance your undersanding of circuis, measuring resisances, currens, and volages across muliple componens. Exend your skills in making breadboard

### Efficiency of the Mutual Fund Industry: an Examination of U.S. Domestic Equity Funds: 1995-2004

Geysburg Economic Review Volume 1 Aricle 4 2006 Efficiency of he Muual Fund Indusry: an Examinaion of U.S. Domesic Equiy Funds: 1995-2004 Chase J. Sewar Geysburg College Class of 2006 Follow his and addiional

### Period 4 Activity Solutions: Transfer of Thermal Energy

Period 4 Aciviy Soluions: Transfer of Thermal nergy 4.1 How Does Temperaure Differ from Thermal nergy? a) Temperaure Your insrucor will demonsrae molecular moion a differen emperaures. 1) Wha happens o

### Dynamic Hybrid Products in Life Insurance: Assessing the Policyholders Viewpoint

Dynamic Hybrid Producs in Life Insurance: Assessing he Policyholders Viewpoin Alexander Bohner, Paricia Born, Nadine Gazer Working Paper Deparmen of Insurance Economics and Risk Managemen Friedrich-Alexander-Universiy

### Individual Health Insurance April 30, 2008 Pages 167-170

Individual Healh Insurance April 30, 2008 Pages 167-170 We have received feedback ha his secion of he e is confusing because some of he defined noaion is inconsisen wih comparable life insurance reserve

### INSTITUTE OF ECONOMIC STUDIES

INIU O CONOMIC UDI aculy of social sciences of Charles Universiy uures Conracs Lecurer s Noes No. Course: inancial Marke Insrumens I eacher: Oldřich Dědek I. BAIC AUR O ORWARD AND UUR CONRAC. Classificaion

### The Real Business Cycle paradigm. The RBC model emphasizes supply (technology) disturbances as the main source of

Prof. Harris Dellas Advanced Macroeconomics Winer 2001/01 The Real Business Cycle paradigm The RBC model emphasizes supply (echnology) disurbances as he main source of macroeconomic flucuaions in a world

### Estimating Time-Varying Equity Risk Premium The Japanese Stock Market 1980-2012

Norhfield Asia Research Seminar Hong Kong, November 19, 2013 Esimaing Time-Varying Equiy Risk Premium The Japanese Sock Marke 1980-2012 Ibboson Associaes Japan Presiden Kasunari Yamaguchi, PhD/CFA/CMA

### FORWARD AND FUTURES CONTRACTS

Page1 C H A P T E R 2 FORWARD AND FUTURES CONTRACTS 2.1 INTRODUCTION The main purpose of forward and fuures conracs is he managemen of risk. The exposure o risk as a resul of ransacing in he spo marke

### MOTION ALONG A STRAIGHT LINE

Chaper 2: MOTION ALONG A STRAIGHT LINE 1 A paricle moes along he ais from i o f Of he following alues of he iniial and final coordinaes, which resuls in he displacemen wih he larges magniude? A i =4m,

### Benefit-Cost Analysis

Slide 1 Benefi-Cos Analysis Sco Pearson Sanford Universiy Sco Pearson is Professor Emerius of Agriculural Economics a he Food Research Insiue, Sanford Universiy. He has paricipaed in projecs ha combined

### Chapter 4: Exponential and Logarithmic Functions

Chaper 4: Eponenial and Logarihmic Funcions Secion 4.1 Eponenial Funcions... 15 Secion 4. Graphs of Eponenial Funcions... 3 Secion 4.3 Logarihmic Funcions... 4 Secion 4.4 Logarihmic Properies... 53 Secion

### Circuit Types. () i( t) ( )

Circui Types DC Circuis Idenifying feaures: o Consan inpus: he volages of independen volage sources and currens of independen curren sources are all consan. o The circui does no conain any swiches. All

### Risk Modelling of Collateralised Lending

Risk Modelling of Collaeralised Lending Dae: 4-11-2008 Number: 8/18 Inroducion This noe explains how i is possible o handle collaeralised lending wihin Risk Conroller. The approach draws on he faciliies

### Depreciation and Corporate Taxes

205 Depreciaion and Corporae Taxes Chris Hendrickson Carnegie Mellon Universiy Tung Au Carnegie Mellon Universiy 205.1 Depreciaion as Tax Deducion 205.2 Tax Laws and Tax Planning 205.3 Decision Crieria

### The Price of Gold: A Global Required Yield Theory

The Price of Gold: A Global Required Yield Theory Chrisophe Faugère Assisan Professor of Finance School of Business, Universiy a Albany Albany, NY 2222 (58) 442-4973 and Julian Van Erlach CEO, Nexxus Wealh

### The Grantor Retained Annuity Trust (GRAT)

WEALTH ADVISORY Esae Planning Sraegies for closely-held, family businesses The Granor Reained Annuiy Trus (GRAT) An efficien wealh ransfer sraegy, paricularly in a low ineres rae environmen Family business

### Chapter 2 Problems. s = d t up. = 40km / hr d t down. 60km / hr. d t total. + t down. = t up. = 40km / hr + d. 60km / hr + 40km / hr

Chaper 2 Problems 2.2 A car ravels up a hill a a consan speed of 40km/h and reurns down he hill a a consan speed of 60 km/h. Calculae he average speed for he rip. This problem is a bi more suble han i

### AP Calculus AB 2013 Scoring Guidelines

AP Calculus AB 1 Scoring Guidelines The College Board The College Board is a mission-driven no-for-profi organizaion ha connecs sudens o college success and opporuniy. Founded in 19, he College Board was

### Analysis of tax effects on consolidated household/government debts of a nation in a monetary union under classical dichotomy

MPRA Munich Personal RePEc Archive Analysis of ax effecs on consolidaed household/governmen debs of a naion in a moneary union under classical dichoomy Minseong Kim 8 April 016 Online a hps://mpra.ub.uni-muenchen.de/71016/

### Capital Flows and Current Account Sustainability: The Ghanaian Experience

CREDIT Research Paper No. 07/07 Capial Flows and Curren Accoun Susainabiliy: The Ghanaian Experience by Absrac Maxwell Opoku-Afari Boh heoreical and operaional definiions of curren accoun susainabiliy

### Topic Overview. Learning Objectives. Capital Budgeting Steps: WHAT IS CAPITAL BUDGETING?

Chaper 10: THE BASICS OF CAPITAL BUDGETING Should we build his plan? Topic Overview Projec Types Capial Budgeing Decision Crieria Payback Period Discouned Payback Period Ne Presen Value () Inernal Rae

### Name: Algebra II Review for Quiz #13 Exponential and Logarithmic Functions including Modeling

Name: Algebra II Review for Quiz #13 Exponenial and Logarihmic Funcions including Modeling TOPICS: -Solving Exponenial Equaions (The Mehod of Common Bases) -Solving Exponenial Equaions (Using Logarihms)

### Acceleration Lab Teacher s Guide

Acceleraion Lab Teacher s Guide Objecives:. Use graphs of disance vs. ime and velociy vs. ime o find acceleraion of a oy car.. Observe he relaionship beween he angle of an inclined plane and he acceleraion

### Newton s Laws of Motion

Newon s Laws of Moion MS4414 Theoreical Mechanics Firs Law velociy. In he absence of exernal forces, a body moves in a sraigh line wih consan F = 0 = v = cons. Khan Academy Newon I. Second Law body. The

### Rotational Inertia of a Point Mass

Roaional Ineria of a Poin Mass Saddleback College Physics Deparmen, adaped from PASCO Scienific PURPOSE The purpose of his experimen is o find he roaional ineria of a poin experimenally and o verify ha

### Vector Autoregressions (VARs): Operational Perspectives

Vecor Auoregressions (VARs): Operaional Perspecives Primary Source: Sock, James H., and Mark W. Wason, Vecor Auoregressions, Journal of Economic Perspecives, Vol. 15 No. 4 (Fall 2001), 101-115. Macroeconomericians

### WHAT ARE OPTION CONTRACTS?

WHAT ARE OTION CONTRACTS? By rof. Ashok anekar An oion conrac is a derivaive which gives he righ o he holder of he conrac o do 'Somehing' bu wihou he obligaion o do ha 'Somehing'. The 'Somehing' can be

### SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES

Inernaional Journal of Accouning Research Vol., No. 7, 4 SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Mohammad Ebrahimi Erdi, Dr. Azim Aslani,

### Pulse-Width Modulation Inverters

SECTION 3.6 INVERTERS 189 Pulse-Widh Modulaion Inverers Pulse-widh modulaion is he process of modifying he widh of he pulses in a pulse rain in direc proporion o a small conrol signal; he greaer he conrol

### The yield curve, and spot and forward interest rates Moorad Choudhry

he yield curve, and spo and forward ineres raes Moorad Choudhry In his primer we consider he zero-coupon or spo ineres rae and he forward rae. We also look a he yield curve. Invesors consider a bond yield

### Glenn P. Jenkins Queen s University, Kingston, Canada and Eastern Mediterranean University, North Cyprus

COST-BENEFIT ANALYSIS FOR INVESTMENT DECISIONS, CHAPTER 3: THE FINANCIAL APPRAISAL OF PROJECTS Glenn P. Jenkins Queen s Universiy, Kingson, Canada and Easern Medierranean Universiy, Norh Cyprus Developmen

### Stock Trading with Recurrent Reinforcement Learning (RRL) CS229 Application Project Gabriel Molina, SUID 5055783

Sock raing wih Recurren Reinforcemen Learning (RRL) CS9 Applicaion Projec Gabriel Molina, SUID 555783 I. INRODUCION One relaively new approach o financial raing is o use machine learning algorihms o preic

### Can Austerity Be Self-defeating?

DOI: 0.007/s07-0-0-7 Auseriy Can Auseriy Be Self-defeaing? Wih European governmens cuing back on spending, many are asking wheher his could make maers worse. In he UK for insance, recen OECD esimaes sugges

### Two Compartment Body Model and V d Terms by Jeff Stark

Two Comparmen Body Model and V d Terms by Jeff Sark In a one-comparmen model, we make wo imporan assumpions: (1) Linear pharmacokineics - By his, we mean ha eliminaion is firs order and ha pharmacokineic

### MSCI Index Calculation Methodology

Index Mehodology MSCI Index Calculaion Mehodology Index Calculaion Mehodology for he MSCI Equiy Indices Index Mehodology MSCI Index Calculaion Mehodology Conens Conens... 2 Inroducion... 5 MSCI Equiy Indices...

### Market Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand

36 Invesmen Managemen and Financial Innovaions, 4/4 Marke Liquidiy and he Impacs of he Compuerized Trading Sysem: Evidence from he Sock Exchange of Thailand Sorasar Sukcharoensin 1, Pariyada Srisopisawa,

### CAPITAL CONTROLS ON INFLOWS, EXCHANGE RATE VOLATILITY AND EXTERNAL VULNERABILITY *

CAPITAL CONTROLS ON INFLOWS, EXCHANGE RATE VOLATILITY AND EXTERNAL VULNERABILITY * SEBASTIAN EDWARDS Universiy of California, Los Angeles Naional Bureau of Economic Research and ROBERTO RIGOBON Massachuses

### 5.8 Resonance 231. The study of vibrating mechanical systems ends here with the theory of pure and practical resonance.

5.8 Resonance 231 5.8 Resonance The sudy of vibraing mechanical sysems ends here wih he heory of pure and pracical resonance. Pure Resonance The noion of pure resonance in he differenial equaion (1) ()

### A Model for Monetary Policy Analysis in Pakistan

Working paper A Model for Moneary Policy Analysis in Pakisan The Role of Foreign Exchange and Credi Markes Ehsan U. Choudhri Hamza Malik March 2014 When ciing his paper please use he ile and he following