We show that the behaviour of the real exchange rates of the UK, Germany, France and Japan has been characterised by structural breaks which changed the adjustment mechanism. In the context of a Time-Varying Smooth Transition AutoRegressive of the kind introduced by Lundbergh et al (2003), we show that the real exchange rate process shifted in the aftermath of Black Wednesday in the case of the Pound, in 1984-5 in the case of the Franc and, more tentatively, during the Asian crisis of 1997-8 in the case of the Yen.
Exchange Rates International Finance Copeland Pdf
The module introduces students to the theoretical underpinnings that constitute international finance and the nature and extent of monetary and financial relations between countries.The module introduces basic concepts of international macroeconomics such as the balance of payments and exchange rates, and arbitrage conditions. It then proceeds to analyse the impact of opening up the economy on the alternative macroeconomic policies available. The main factors that determine exchange rates between currencies, and the power of different models are also considered. Finally, the module explores 'hot topics' in international finance including the benefits and drawbacks of fixed and floating exchange rates, the concept of a speculative attack, current account imbalances from an inter-temporal perspective, and how world macroeconomic imbalances drove the 2008/09 international financial crisis and recent sovereign debt crisis in Europe.The module has both a theoretical and an applied emphasis in order to apply available theories into the real problems of the world economy. It does not analyse the detailed workings of international financial markets or questions related to firm financial management in international capital markets but students interested in these aspects can acquire basic foundations that are fundamental in understanding the context in which firms and governments work.The topics covered in the module include:1.Open economy macroeconomics and policy.2.Exchange rates determination theory and empirics.3.Microfounded models of the current account.4.International financial flows.5.International indebtedness.6.International financial crises7.International monetary arrangements.
By the end of the module you will be able to: * demonstrate knowledge and understanding of basic theoretical concepts such as exchange rates, interest rates and capital movements in an international setting.* synthesise and critically compare different economic analyses of issues relating to international finance and policy formation.* critically assess and examine the main debates on international money and finance problems arising in the media newspapers and specialised magazines.* understand the implications of capital flows for the international transmission of economic shocks.* identify, analyse and understand macroeconomic policy coordination within a global context.
International financial management is about investment and financing decisions confronting the management of multinational companies due to the international context of their activities. Investment and financing decisions involve the valuation of uncertain future cash flows (Ross 2004, p. 1). A key element of the international context is that these decisions are affected by exchange rate risk. Therefore, the methodology used to support rational decision making in an international context must capture the additional complexity that exchange rate risk and exchange rate forecasting pose.
The framework for investment and financing decisions in an international context is given by the international monetary system and the integration, depth and breadth of international financial markets. Of course, the growing integration of real goods and services markets and the intensity of international trade also play an important role in international financing and investment decisions. Since the breakdown of the Bretton Woods system of fixed exchange rates 50 years ago, most developed countries have adopted a free float, and a comprehensive liberalization of capital and current-account transactions has taken place. This still reflects the current overall trend (see International Monetary Fund (IMF) 2020, p. 3). However, some developed countries in Europe introduced a common currency in 1999, the euro, thus establishing a fixed-rate regime for their common market, while accepting a free float of their currency in relation to countries outside this monetary union (Baldwin and Wyplosz 2020; Brasche 2013; Wagener and Eger 2014). Consequently, managing exchange rate risk and forecasting future exchange rates have become essential aspects of international financial management decision making since the breakdown of the Bretton Woods system.
Bi-grams of EFA conference papers on international finance. This figure shows the most common word pairs in working paper titles presented at EFA conferences between 2009 and 2014 as well as between 2015 and 2020. The number n of co-occurrences is indicated by the thickness of the connection lines; the most common words are located in the center
LDA analysis of EFA conference papers on international finance. This figure shows the top 8 words for each of the 5 topics found by the LDA (Latent Dirichlet Allocation) in the abstracts of all papers from 2009 to 2014 (Panel A) as well as from 2015 to 2020 (Panel B) presented at the EFA conferences. Each word is connected with a probability β of that word belonging to that topic
Our, admittedly rather limited, literature review aims to answer the following key methodologically driven questions on international finance: (1) What theoretical framework is presented for exchange rate determination and forecasting? (2) What exchange rate forecasting method is applied when presenting valuation examples? (3) What valuation methods do textbooks propose for conducting cross-border valuations? (4) What method is proposed to calculate the cost of equity? (5) How do the textbooks evaluate the hypothesis that the home currency and foreign currency approaches are equivalent?Footnote 4 We acknowledge that these five questions are not at all comprehensive, and that other interesting questions have not been considered. However, we believe that the questions addressed in our review are highly relevant in a vast majority of practical and empirical cases.
The sample of currently available textbooks presented in Table 1 emphasizes the relevance of exchange rate determination and forecasting and uses international parity relations (IPR) as the relevant theoretical framework.Footnote 5 In contrast, textbooks on international financial management available shortly before and after the breakdown of the Bretton Woods regime did not cover this area.Footnote 6 With a free-float regime, it became more and more necessary to forecast exchange rates (see Giddy and Dufey 1975).Footnote 7 An early coherent presentation of international parity conditions as an integrated theory of exchange rate equilibrium based on expectations can be found in Giddy (1976), Aliber (1978), and Roll and Solnik (1979). This framework still underpins the theoretical exposition of the current textbooks presented in Table 1. Our sample confirms that the theoretical foundation of exchange rate determination and forecasting based on international parity conditions has remained the relevant paradigm since the breakdown of the Bretton Woods system of fixed rates.
The literature review of textbooks in international financial management sheds some light on where we stand today and what knowledge is thought to be of use to future professionals and academics. It shows that theoretical and empirical research has found its way to the applied side of international finance. We can now put forward further interesting advances in international financial management included in this special issue of the Journal of Business Economics.
Schüler (2021) develops a comprehensive framework for cross-border discounted cash-flow valuation that is not found in the literature. The valuation framework encompasses the derivation of the risk-adjusted rate of return in order to discount future expected cash flow in accordance with the global CAPM while considering relevant risks such as exchange rate risk, business risk, financial risk, the risk related to tax shields, and the risk of default. The paper shows how the foreign currency and home currency approaches are equivalent when assuming uncertainty and risk aversion. This is demonstrated using the adjusted present value (APV) approach. The risk-adjusted discount rates to be used in the corresponding flow-to-equity (FTE) approach and in the weighted average cost of capital (WACC) approach are also presented. This paper is therefore relevant to the valuation of not only a foreign company, but also of a domestic company that generates cash flows in a foreign currency and/or uses debt-financing instruments denominated in a foreign currency.
Certainly, international financial management and valuation is a special discipline in the broader field of finance. According to our analysis of the annual meetings of the European Finance Association, such topics are of persistent relevance, especially with respect to issues of foreign exchange management and asset pricing.
For example, Zenoff and Zwick (1969), a textbook written during the Bretton Woods regime of fixed exchange rates, reduces the exchange rate forecasting problem to the forecasting of inflation as a primary cause of currency devaluations and the imposition of exchange controls. The textbook by Weston and Sorge (1972), which was written shortly after the breakdown of the Bretton Woods system, likewise does not discuss international parity conditions and their possible applicability to forecasting.
The readings are provided on the lecture slides. Students are encouraged to follow the ongoing debate on international finance and exchange rate policies as reported in Frankfurter Allgemeine Zeitung, Financial Times (German or English edition), the Economist (for weekly updates) or Auszüge aus Presseartikeln of Deutsche Bundesbank (free subscription available at the Pressezentrum of Deutsche Bundesbank). 2ff7e9595c
Comments