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Introduction

Content Introduction The inflation rate differentials analysis The interest rate differentials analysis Calculation and analysis the purchasing power parity theory Interpretation of Purchasing power parity Formula derivation of Purchasing power parity Calculation and analysis between UK and USA Every country comprehensive analysis Calculate and analysis the interest rate parity theory Interpretation of interest rate parity Formula derivation of Interest rate parity Calculation and analysis between UK and USA The forward rate is not an unbiased estimator of the spot rate Statistical test of forecast bias Calculate and interpret the forward premium or discount Introduction International Finance is a branch of the entire financial industry, involving the relationship between two or more countries? monetary policy and macroeconomic. International financial researches the global financial system, international monetary system, balance of payments, exchange rates, FDI. It is sometimes also referred to as cross-border finance. In addition to issues mentioned before, international financial studies investors and multinational corporations, as well as the international risks firms may face. This essay will mainly discuss the international finance by analyzing three different countries? interest rate, inflation rate, spot and forward rate (USA: Dollar; UK: Pound; Australia: Australian Dollar ). With the analysis of these rates, the essay will also check the purchasing power parity and the interest rate parity, which seem to be the most important theories in international finance. When dealing with the spot and forward rate, the easy will analyze whether the forward rate is an unbiased estimator of the spot rate. Based on the theory learnt, data and calculations will also be carried out to make the analysis more convincible. The inflation rate differentials analysis This section addresses two empirical questions concerning the three main economies, i.e. USA, UK and Australia. The questions are whether the inflation differentials exist within the world scope; and how sizable they are. The inflation rate is one of the most important measures of inflation, the rate of the increase of a price index over a specific period of time. ...read more.

Middle

The exchange rate of it was appreciated. At this time, the percentage change in the value of UK pounds euk? euk?= (st-so)/so = (1.4300-1.6448)/1.6448 =- 0.13059 This reflects the percentage change in the value of UK pounds in fact depreciates by 13.059 percent. And the ratio R= = (- 0.0296415)/(- 0.13059) = 0.2269755 The ratio is positive, which reflects that the PPP theory has occurred. Because the euk ratio is negative, and the euk? ratio is also negative, it reflects that it represents more favorable purchasing power for US dollar than UK pound. Every country comprehensive analysis Table 2-2. USD to AUD spot and forward rate USD to AUD spot and forward rate time 2011.12.31 2011.09.30 2011.06.30 2011.03.31 spot rate 0.9754 1.0289 0.9341 0.967 three month forward rate 1.0361 0.982 1.0849 1.0224 (st-so)/so 0.06223088 -0.0455827 0.16143882 0.0572906 time 2010.12.31 2010.09.30 2010.06.30 2010.03.31 spot rate 0.9756 1.0328 1.1839 1.0895 three month forward rate 0.9867 1.0447 1.1971 1.1008 (st-so)/so 0.011377614 0.01152208 0.01114959 0.0103717 time 2009.12.31 2009.09.30 2009.06.30 2009.03.31 spot rate 1.1119 1.1331 1.2369 1.4393 three month forward rate 1.1226 1.1261 1.2315 1.4354 (st-so)/so 0.009623168 -0.0061777 -0.0043658 -0.0027097 Table 2-3. Ratio of Australia e'/e Q1 Q2 Q3 Q4 2011 (4.96) (97.09) (19.98) 33.66 2010 (2.02) (0.90) (0.73) (0.84) 2009 0.11 0.17 0.22 (1.51) Table 2-4. USD to GBP spot and forward rate USD to GBP spot and forward rate time 2011.12.31 2011.09.30 2011.06.30 2011.03.31 spot rate 1.5541 1.5578 1.6055 1.603 three month forward rate 1.5527 1.5564 1.6036 1.6009 (st-so)/so -0.000900843 -0.000899 -0.001183 -0.00131 time 2010.12.31 2010.09.30 2010.06.30 2010.03.31 spot rate 1.5169 1.4961 1.5758 1.5657 three month forward rate 1.5161 1.496 1.5748 1.5645 (st-so)/so -0.000527391 -6.68E-05 -0.000635 -0.000766 time 2009.12.31 2009.09.30 2009.06.30 2009.03.31 spot rate 1.4334 1.6469 1.5994 1.6149 three month forward rate 1.4339 1.6466 1.599 1.6139 (st-so)/so 0.000348821 -0.000182 -0.00025 -0.000619 Table 2-5. Ratio of United Kingdom e?/e Q1 Q2 Q3 Q4 2011 0.07 0.13 0.10 0.07 2010 0.09 0.04 0.00 0.03 2009 0.02 0.01 0.01 (0.06) ...read more.

Conclusion

At that time, the spot rate is equal to the forward rate. In other quarters, UK meet the forward premium. For Australia (the relation between the USA and the Australia), in the three years, the forward rate derives a lot from spot rate. In the first three quarters of 2009 and third quarter of 2011, Australia meets a forward discount and the for the rest quarters a forward premium. Conclusion In this report, it analyses three currencies (based on the USA dollar) quarterly with the past three years. It researches and analyses those countries by the real date. It explained the purchasing power parity theory and the interest rate parity. And it used the sophisticated quantitative techniques and the theoretical analysis to show that the PPP theory and the IRP theory do not occur perfectly; in fact, it has many barriers, which cannot be explained completely. But they have still affected the reality. Then, this report explains the forward rate is not an unbiased estimator of the spot rate. By the analysis data, it calculated and interpreted the forward premium or discount in the end. Reference Altissimo, F., P. Benigno and D. Rodriguez-Palenzuela (2004), Inflation Differentials in a Currency Area: Facts, Explanations and Policies. mimeo. Bilson, J.F.O. (1981). Rational expectations and the exchange rate. In The Economics of Exchange Rates, edited by Jacob A. Frenkel and H.G. Johnson, p. 75-96. Reading, Massachusetts: Addison- Wesley. Eun, Cheol S.; Resnick, Bruce G. (2011). International Financial Management, 6th Edition. New York, NY: McGraw-Hill/Irwin Gandolfo, Giancarlo (2002). International Finance and Open-Economy Macroeconomics. Berlin, Germany: Springer Hakkio, Craig S., (1986). Interest Rates and Exchange Rates-What Is the Relationship? Economic Review, Federal Reserve Bank of Kansas City, issue (November), pp. 33-43. NIJMAN, THEOE., FRANZ C. PALM AND CHRISTIAN P. WOLFF (1993), Premia in forward foreign exchange as unobserved components: A note, Journal of Business & Economic Statistics, July 1993, 11: 361-365. Pilbeam, Keith (2006). International Finance, 3rd Edition. New York, NY: Palgrave Macmillan. WOLFF, CHRISTIAN P. (1987), Forward foreign exchange rates, expected spot rates, and premia: A signal-extraction approach, Journal of Finance, June 1987, 42: 395-406. ...read more.

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