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Contents

Uncovered Interest Arbitrage .................... 395 Covered Interest Arbitrage ....................... 396 Foreign-Exchange Market Speculation ........... 397

How to Play the Falling (Rising) Dollar ................................................. 399

Foreign Exchange Trading as a Career .................................................. 399

Foreign Exchange Traders Hired by Commercial Banks, Companies, and Central Banks ................................ 400

Currency Markets Draw Day Traders ........ 400 Summary ................................................ 401 Key Concepts & Terms .............................. 402 Study Questions ....................................... 402

CHAPTER 12

Exchange-Rate Determination .......................................................... 405

What Determines Exchange Rates? ............... 405 Determining Long-Term Exchange Rates ....... 407

Diversification, Safe Havens, and Investment Flows .................................. 421

Relative Price Levels ............................... 408 Relative Productivity Levels ...................... 408

Preferences for Domestic or Foreign Goods ................................................. 408

Trade Barriers ...................................... 410

Inflation Rates, Purchasing Power Parity, and Long-Term Exchange Rates ................... 410

Law of One Price .................................. 410

The Big MacIndex and the Law of One Price ............................................ 411

Purchasing Power Parity ......................... 412

The Ups and Downs of the Dollar ................ 421 The 1980s ............................................ 421 The 1990s ............................................ 422 The First Decade of the 2000s .................. 423 Exchange-Rate Overshooting ....................... 423 Forecasting Foreign-Exchange Rates .............. 425 Judgmental Forecasts .............................. 426 Technical Forecasts ................................ 426 Fundamental Analysis ............................ 428

International Comparisons of GDP: Purchasing Power Parity ......................... 429

Determining Short-Term Exchange Rates: The Asset-Market Approach ........................ 415

Comercial Mexicana Gets Burned By Speculation ..................................... 430

Inflation Differentials and the Exchange Rate ...................................... 416

Relative Levels of Interest Rates ................ 417 Expected Change in the Exchange Rate ....... 420

Summary ................................................ 430 Key Concepts & Terms .............................. 431 Study Questions ....................................... 431

CHAPTER 13

Mechanisms of International Adjustment .......................................... 433

Price Adjustments ..................................... 434 Gold Standard ...................................... 434 Quantity Theory of Money ...................... 434 Current-Account Adjustment ................... 435

Financial Flows and Interest-Rate Differentials ............................................. 436

Disadvantages of Automatic Adjustment Mechanisms ............................................ 439

Monetary Adjustments ............................... 439 Summary ................................................ 440 Key Concepts & Terms .............................. 440 Study Questions ....................................... 440

Income Adjustments .................................. 438

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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