i. She International Monetary Environment 1
1. The Foreign Exchange Market 3
Foreign Exchange Trading Volume 3
Geographic Foreign Exchange Rate Activity 4
Spot Exchange Rates 7
Currency Arbitrage 10
Short-term Foreign Exchange Rate Movements 13
Long-term Foreign Exchange Movements 16
Summary 18
Exercises 19
Further Reading 20
Appendix 1 A; Trade-weighted Exchange Rate Indexes 20
Appendix IB: The Top Foreign Exchange Dealers 23
L Sanei(«teMuai o , A - 25
The Gc'd S:3ndamJ 1330 tc Seta 25
The interwar Period: 1918 to 1939 27
The Bretton Woods Agreement: 1944 to 1973 28
Central Bank Intervention during Bretton Woods 30
The Breakdown of the Bretton Woods 32
The Transition Years: 1971 to 1973 33
International Reserve Currencies 34
Floating Exchange Rates: 1973 to the Present 39
Currency Boards and "Dollarization" 41
The Choice of an Exchange Rate System 44
Optimum Currency Areas 48
The European Monetary System and the Euro 49
Summary 51
Exercises 52
Further Reading 53
Appendix 2A: Current Exchange Practices of Specific Countries 53
The Balance of Payments 59
Current Account 52
Financing the Current Account 65
Additional Summary Measures 68
Transactions Classifications 69
Balance of Payments Equilibrium and Adjustment 7!
The U.S. Foreign Debt 74
How Bad is the U.S. Foreign Debt? 7b
Summary 79
Exercises 80
Further Reading 81
11» 1y iapT ?*- -w, pm «- 83
4, Cor'м ”l'"'' g '' -’"t j,- • • --'■** 85
Forwara Rates 86
Swaps 87
Futures 91
Options 94
Recent Practices 97
Summary 98
Exercises 99
further Reading 100
5, Thom' , 101
Reasom -oi Ofrshoie '''‘-g 101
Libor 103
interest Rate Spreads and Risk 105
International Banking Facilities 106
Offshore Banking Practices 108
Summary 111
Exercises 112
Further Reading 112
6, Exchange Rates,, Interest Rates, and Interest Parity 115
Interest Parity 115
Interest Rates and Inflation 119
Exchange Rates, Interest Rates, and inflation 119
Expected Exchange Rates and the Term Structure of Interest Rates 121
Summary 124
Exercises 125
Further Reading 125
Appendix 6A: What Are Logarithms, and Why Are They Used in Financial Research? 126
Prices and Exchange Rates: Purchasing Power Parity 129
Absolute Purchasing Power Parity 130
The Big Mac Index 131
Relative Purchasing Power Parity 133
Time, inflation, and PPP 134
Deviations from PPP 135
Overvalued and Undervalued Currencies 139
Real Exchange Rates 143
Summary 144
Exercises 145
Further Reading 145
Appendix 7A; The Effect on PPP by Relative Price Changes 146