The Relationship Between Exchange Rates Essay Example for Free

The Relationship Between Exchange Rates Essay The relationship between exchange rates, interest rates †¢ In this lecture we will learn how exchange rates accommodate equilibrium in ï ¬ nancial markets. For this purpose we examine the relationship between interest rates and exchange rates. Interest rates are the return to holding interest-bearing ï ¬ nancial assets. In the previous lecture we have pointed out that as being a ï ¬ nancial asset exchange rates tend to adjust more quickly to new information that goods prices. Like exchange rates, interest rates are also the prices of ï ¬ nancial assets and hence adjust quickly to new information. †¢ The proï ¬ t-seeking arbitrage activity will bring about an interest parity relationship between interest rates of two countries and exchange rate between these countries. †¢ A U.S. investor deciding between investing say in New York and in Tokyo must consider several things: – the interest rate in the U.S., i$ , (interest rate in aU.S ¿ dollar denominated bond, or rate of return in a U.S. dollar denominated US stock etc), interest rate in Japan (iY ; – the spot exchange rate, S; and – the future exchange rate for maturity date, forward rate, F . †¢ If the investor did not lock in a future exchange rate now, the unknown future spot exchange rate would make the investment risky. The investor can eliminate the uncertainty over the future dollar value of the investment by covering the investment with a forward exchange contract. †¢ If the investor covers the investment with a forward contract the arbitrage between two investment opportunities results in a covered interest parity (CIP) condition: (1 + i$ ) = (1 + iY ) 1 F S (1) which may be rewritten as (1 + i$ ) F = (1 + iY ) S (2) †¢ The interest rate parity equation can be approximated for small interest rates by: i$ − iY = F −S S (3) †¢ This later equation says that interest diï ¬â‚¬erential between a US denominated investment instrument and a Yen denominated investment instrument is equal to the forward premium or discount on the Yen. †¢ Example: i$ = 5%, iY = 3%. Suppose S = 0.0068 dollars per Yen. What should be the 90-day forward rate? 0.05 − 0.03 = F − 0.0068 0.0068 F = 0.0068 + 0.02 âˆâ€" 0.0068 = 0.00694 Thus we expect that a 90-day forward rate of $0.00694 to give a 90-day forward premium equal to the 0.02 interest diï ¬â‚¬erential. †¢ If the forward exchange rates were not consistent with the respective interest rates, then arbitrageurs could proï ¬ t by immediately changing currency in the spot market, investing it and locking in the proï ¬ table forward exchange rate. These actions in the market would increase the spot rate and lower the forward rate, bringing the forward premium into line with the interest diï ¬â‚¬erential. †¢ Suppose the actual 90-day forward rate is not 0.00694 dollars per yen but 0.0071 dollars per yen. Then proï ¬ t-seeking arbitrageurs could buy Yen spot, then invest and sell the Yen forward for dollars, since the forward price of Yen is higher than that implied by the covered interest parity relation. These actions will tend to increase spot rate and lower the forward rate, thereby bringing the forward premium back in line with the interest diï ¬â‚¬erential. 2 †¢ The interest rate parity condition (CIP) can be used to compute eï ¬â‚¬ective return on a foreign investment. Re-write (3) as: i$ = i Y + F −S S (4) This latter equation says that the return on a US dollar denominated asset (US dollar interest rate) is given by the Japanese interest rate plus the forward premium or discount on Yen. If CIP holds then equation (4) will hold as well. †¢ What happens when an investor does not use the forward market? Then we can not expect eï ¬â‚¬ective return on US dollar denominated asset be given by (4) as the investor in question will not be able to get the premium on Yen (or lose the discount). In this case, we say investor has an uncovered investment. The eï ¬â‚¬ective return then will be determined by the Japanese interest rate plus the change in the spot exchange rate between today and say 90 days from now. Letting it be the domestic interest rate on a domestic currency denominated asset, say US Dollar, between date t and t + 1, and similarly iâˆâ€" stands for foreign interest rate, t the eï ¬â‚¬ective return on a domestic currency denominated ï ¬ nancial asset will be given by: â ˆâ€" it = it + ∆St+1 (5) Which in our example will be i$ = iY + ∆S without time subscript. †¢ Suppose in the example we have been considering so far, the US investor did not use the forward market. After 90 days when the investor go to change Yen back to dollars, she ï ¬ nds that the Yen has appreciated against US dollar say by 1 percent. This means that your Yen buys 1 percent more dollars than they did before. This means that eï ¬â‚¬ective return on Yen investment then will be given by iY + ∆S = 0.03 + 0.01 = 0.04. 3 Hence, the return on a foreign investment plus the expected change in the exchange rate (in the value of Yen) is our expected return on a Yen investment. †¢ If the forward exchange rate is equal to expected future spot rate (Mathematically this means that E [St+1 | given all the available information] = Ft ) then the forward premium/discount is also equal to the expected change in the exchange rate. In this case we say that uncovered interest parity, (UIP) holds. †¢ More formally UIP condition says that the expected change in spot exchange rate is equal to interest diï ¬â‚¬erential. E(St+1) − St = i t − iâˆâ€" t St (6) where for E denotes the expectation operator. At this level you don’t need to worry about what this operator means, you can simply think ESt+1 denoting the expected future value of spot rate. †¢ As above analysis indicate forward exchange rates incorporate expectations about the future spot exchange rates. If the forward exchange rate is equal to the expected future spot rate, then the forward premium is also the expected change in the exchange rate. In this case, UIP is said to hold. †¢ Empirical studies indicate that there are small deviations from CIP. These deviations are possible due to presence of transactions cost, diï ¬â‚¬erential taxation across countries on the returns from investing in ï ¬ nancial markets, government control, and political risk involved in investing in diï ¬â‚¬erent countries. However, these deviations are small enough to assume that CIP holds true almost exactly in the real world data. Therefore, we can say that proï ¬ t-seeking arbitrage activities eliminate proï ¬ t opportunities in the exchange rate markets. Hence, CIP condition can be viewed an equilibrium condition that characterizes the relationship between spot exchange rate, forward rate and interest rates of two countries. 4 †¢ The problem arise in showing if the UIP holds or not in the data. Extensive studies have shown that UIP does not hold in the data especially for the industrialized countries. This means that percentage change in expected future spot rate is not equal to interest diï ¬â‚¬erential. Or, forward rate is not equal to expected future spot rate. Mathematically, this implies that there are deviations from UIP condition stated in (6) above. That is, it − iâˆâ€" − t ESt+1 − St =0 St This means that eï ¬â‚¬ective return diï ¬â‚¬erential is not equal to zero. There are several explanations given in the literature. – there should be proï ¬ t opportunities in the exchange rate market that are being exploited by the investors. That may be possible if the inside trading type of activities are possible and used extensively. In other words, there are informational asymmetries in the market, some investors have more information than others and they make positive proï ¬ ts. Although, this may explain part of the puzzle especially in the very short run, it is hard to believe that these informational asymmetries persist for a long time, especially in ï ¬ nancial markets where information ï ¬â€šow is very rapid and exchange rates adjust rapidly to new information. – It is possible to think that investors are systematically making mistakes in predicting the future value of spot exchange rate. That is, Ft = ESt+1 for a prolonged period of time. This means that forward rate is a biased predictor of future spot rate. Here biased means that it does not correctly predicts the future value of spot exchange rate on average. In other words, an unbiased predictor means that it predicts on average correctly the future value of a price, say exchange rate, so that over the long run the forward rate is just as likely to overpredict the future spot rate as it is to underpredict. Unbiased predictor does not mean that forward rate is a good predictor. What it 5 means is that forward rate is just as likely to guess too high as it is too low future spot rates. There is some evidence that indicates that investors in foreign exchange rate market make systematic mistakes in predicting the future value of spot exchange rate and hence causing systematic deviations from UIP. It may be possible to think scenarios where investors make mistakes in their forecast of future values of asset prices, but the magnitude of these mistakes shouldn’t be that large to account the large deviations we observe in UIP. That is, it is hard to understand why especially over longer time periods investors make big mistakes in a systematic fashion. Over time at least we should expect these errors to shrink a level where deviations from UIP become smaller. – Another explanation is that there should be a premium to take a risk by not covering the investment. This idea is based on the behavior of investors in taking risk. The eï ¬â‚¬ective return diï ¬â‚¬erential between two countries should be dependent on the perceived risk on each asset and the risk aversion of the investors. The risk aversion refers to the tendency of investors to prefer less risk. In terms of investments two investors may agree on the degree of risk associated with two assets, but the more risk-averse investor would require a higher interest rate on the more risky asset to induce her to hold it then the less risky-averse investor would. In ï ¬ nance, by risk we mean the variability of return from any given investment. This is because the more variable the return from an investment is, the less certain we can be about its future value. If investors diï ¬â‚¬er in their risk taking behavior we may observe that deviations from UIP and hence, changes in risk and risk aversion are associated with changes in eï ¬â‚¬ective return diï ¬â‚¬erential (that is interest diï ¬â‚¬erential). That is, it − iâˆâ€" − t ESt+1 â ˆ’ St = f (risk,riskaversion) St 6 The left hand side of this equation is the eï ¬â‚¬ective return diï ¬â‚¬erential (or deviations from UIP). The right hand side can be viewed as the risk premium. âˆâ€" – Since CIP conditionit − it = Ft −St Stholds almost exactly, subtracting ex-pected change in exchange rate from both sides: âˆâ€" it − it − Ft − St ESt+1 − St ESt+1 − St = − St St St Ft − ESt+1 ESt+1 − St = St St (7) or it − iâˆâ€" − t (8) Thus, we ï ¬ nd that the eï ¬â‚¬ective return diï ¬â‚¬erential (or deviations from UIP) is equal to the percentage diï ¬â‚¬erence between forward and expected future spot exchange rate. The right hand side of (7) is usually considered to be a measure of risk premium in the forward exchange rate market. If eï ¬â‚¬ective return diï ¬â‚¬erential is zero, then risk premium will be zero. If it is positive, then there is a positive risk premium on the domestic currency, because the expected future spot price of foreign currency is less than the prevailing forward rate. In other words, traders are oï ¬â‚¬ering to sell foreign currency for domestic currency in the future will receive a premium, in that foreign currency is expected to depreciate (relative to domestic currency) by an amount greater than the current forward rates. Conversely, traders wishing to buy foreign currency for delivery next period will pay a premium to the future sellers to ensure a set future price. The relationship between interest rates and inï ¬â€šation †¢ The real interest rate reï ¬â€šects the nominal interest rate with an adjustment for inï ¬â€šation. In other words, real interest rate is the nominal interest rate adjusted for inï ¬â€šation. †¢ Generally, the nominal interest rate will tend to incorporate inï ¬â€šation expectations. The relationship between interest rates and inï ¬â€šation is given by the Fisher equation: i=r+Ï€ (9) where i is the nominal interest rate, r is the real interest rate and Ï€ is the expected inï ¬â€šation rate. An increase in Ï€ will tend to increase the nominal interest rate. †¢ If the real rate of interest is the same across countries, then the Fisher can be combined with CIP equation: i$ − iY = Ï€U S − Ï€J = F −S S (10) This latter equation says that if real interest rates are the same internationally, then nominal interest rate diï ¬â‚¬erential diï ¬â‚¬er solely by diï ¬â‚¬erences in expected inï ¬â€šation. †¢ Note that relative exchange rate is given by the inï ¬â€šation diï ¬â‚¬erential and assuming that PPP, Fisher equation, and interest rate diï ¬â‚¬erential hold then real interest rates are equalized across countries. The expected exchange rates and the interest rates †¢ The pattern of interest rates over diï ¬â‚¬erent time periods for diï ¬â‚¬erent investment opportunities is known as term structure of interest rates. There are several interest rates. Short run interest rates, long run interest rates, namely 1 month, 3-month, 6-months etc. There are several theories explaining the the structure of interest rates on diï ¬â‚¬erent investment opportunities over time. – Expectations: the long term interest rates tend to equal to the average of short-term rates expected over the holding period. The expected return that will be generated from holding a 10 year bond should be on average be the the sum of holding a series of short term bonds, say 30-day bond rates. – Liquidity premium: Long term investment instruments must incorporate a risk premium since investors prefer short term investments. As the term of 8 holding an instrument rises, the interest rate on that instrument should rise as well. – Preferred Habitat: There exists separate markets for short and long term assets, with interest rates determined by conditions in each market. †¢ Under conditions of freely ï ¬â€šowing capital across countries, the term structures in diï ¬â‚¬erent currencies infer expected exchange rate changes, even if forward exchange markets for these currencies do not exist. †¢ If the term structure lines for two currencies are: – parallel, then exchange rate changes are expected to be constant; – diverging, then the high interest rate currency is expected to depreciate at an increasing rate over time; – converging, then the high-interest rate currency is expected to depreciate at a declining rate relative to the low-interest rate currency.

The Importance of Educating Jail and Prison Inmates Essay -- importanc

Summary This paper explores the benefits provided by educational programs in jails and prisons. Included are the reasons inmates need education in order to successfully reenter society once they are released and use the knowledge and skills they have learned to obtain a job in order to support themselves and their families. Also examined in the paper are the financial benefits of incorporating educational programs instead of cutting them, as well as the effect these programs play on the recidivism rate. Lastly is a focus on understanding the importance of education and job training, even though the recipients are criminals. ------------------------------------------------------------------------ A controversial issue in the criminal justice field is whether or not educational programs should be offered to inmates in jail while they are incarcerated. While some might argue that taxpayers should not be forced to fund these types of programs, others agree that it is extremely beneficial to not only the inmates but also the taxpayers. Not only are the inmates the people in society who need education the most, but studies have shown a significant decrease in the recidivism rate of inmates who participated in educational programs while incarcerated. Jails and prisons should increase educational programs to inmates because inmates need education more than ever, it is more financially efficient to provide educational programs and it significantly reduces the recidivism rate. According to experts and inmates, education is a key to successful reentry into society that most inmates are lacking. Over the past twenty years, the need for education within jails and prisons has risen to an all-time high... ...grams-could-save-money Buss, E. G. (2010). Stepping stones to successful reentry. Corrections Today, 72(4), 6-10. Retrieved from http://search.proquest.com/docview/746486739?accountid=38223 Esperian, J. H. (2010). The effect of prison education programs on recidivism. Journal of Correctional Education, 61(4), 316-334. Retrieved from http://search.proquest.com/docview/871418247?accountid=38223 Skorton, D., & Altschuler, G. (2013, March 25). College behind bars: How educating prisoners pays off. Forbes. Retrieved from http://www.forbes.com/sites/collegeprose/2013/03/25/college-behind-bars-how-educating-prisoners-pays-off/ Steurer, S. J., Linton, J., Nally, J., & Lockwood, S. (2010). The top-nine reasons to increase correctional education programs. Corrections Today, 72(4), 40-43. Retrieved from http://search.proquest.com/docview/746496632?accountid=38223

Racial Formation Summary Essay

Racial Formations by Michael Omi and Howard Winant, in my eyes, successfully explained how we as a society view race and gives us a sense of how it is observed within social contexts. Omi and Winant used media, ideas, and everyday examples to portray their views about race. Omi and Winant’s article began with the Susie Guillory Phipps’s case about how she had (Omi and Winant 2014) â€Å"unsuccessfully sued the Louisiana Bureau of Vital Records† (p.13) because she wanted to change her racial distinction from black to white on her birth certificate. Phipps argument was that racial classifications were unconstitutional. However, the court had upheld the belief that classifying individuals based on race was indeed constitutional. The Phipps case demonstrated for many centuries, that the United States had always tried to define race and how it is to fit within our social context. Omi and Winant then goes on to say this struggle to define race is not only seen in the U nited States, but is seen in other locations around the world, such as Europe. With exploration of the new world, many Europeans had believed that anyone who was not white had to have lesser freedom, if any at all, because these non-white were seen as inferior and less fit for society. Even to this every day, many individuals try to discover the â€Å"scientific meaning† of race. These individuals want to argue that race in not (Omi and Winant 2014) â€Å"social, political, or economic determination† (p. 15) but instead race can be found within an individual’s underlying characteristics which can be identified through skin color or physical attributes. Omi and Winant further showed how race can be seen as a social concept as well. For example, they explained how many people in contemporary British politics use the term black to mean any nonwhites, which surprisingly has not lead to any retaliation by any people. As a matter of fact, some Asian and Afro-Caribbean youth are using the term for self identity. Omi and Winant explains this phenomenon as â€Å"racial formations† which refers to the (Omi and Winant 2014) â€Å"process of by which social, economic, and political forces determine the content and importance of racial categories, and by which they are shaped by racial meanings† (p.15). Omi and Winant also goes on to explain within everyday life, individuals tend to create racial identities for others. These preconceived thoughts are like expectations we give  ourselves about other races. These preconceived thoughts did not just occur over night, they are a result of the historical events that has occurred over time and still shape the way we think about other races to this very day. Constructing Race, Cheating, White Privilege Constructing Race, Creating White Privilege by Pem Davidson Buck illustrated from the beginning of European colonization, there was a sense of how white individuals granted themselves privileges that no other race could have. To keep these racial privileges separate, laws such as the one in 1691punished European women who married African Americans or Native American men. The white individuals were so driven to separate themselves from other races, that European men who had children with an African or Native American, or any slave for that matter, were not responsible for the children. This meant that African American or the Natives did not become wealthy and was done so that the white people did not feel threatened by other race’s power. Buck then goes on to say that (2014) â€Å"Whites had an equal interest in the maintenance of whiteness and white privilege, and that it was the elite† (pg.35). This meant that white supremacy was taught to others and thus engraved in their minds for years after. All this was created so that whites would have power over other races. Additionally, whites reserved the right to whip African Americans; however, it was illegal to whip white people. On top of this, African Americans were denied the right to having a family just because husbands could have authority for their wives and not their owners. Buck then goes into talks about Psychological Wage. Buck describes psychological wage as having a feeling of superiority for the poor whites because their whiteness made up for the terrible economic situation they were in. This sense of superiority further helped the rich whites because the poor had supported this separate racial system and thus the rich had control of labor and the economy.

The American Renaissance Transcendentalism, Romanticism and Dark Romanticism - Free Essay Example

Sample details Pages: 4 Words: 1084 Downloads: 8 Date added: 2019/07/08 Category Philosophy Essay Level High school Tags: Transcendentalism Essay Did you like this example? The American Renaissance period, circa 1820-1865, announced a new sense of nationalism that focused on the expression of modernism, academic classicism, and technology. The movement developed from various American authors trying to formulate a distinctive American literature based upon the works of European literature. However, these novels, poems, and short stories that were created, made use of innate dialect, scenery, and historical figures, in order to touch base on the American issues of this time. Don’t waste time! Our writers will create an original "The American Renaissance: Transcendentalism, Romanticism and Dark Romanticism" essay for you Create order Some of the considerable issues during this time included abolitionism and religious tolerance. With the influence of these circumstances during the American Renaissance period, Transcendentalism, Romanticism, and Dark Romanticism became to take root within the world of literature by virtue of authors like Margaret Fuller, Ralph Waldo, Herman Melville, Nathaniel Hawthorne, and Edgar Allan Poe. The academic movement, Transcendentalism, was closely associated with the American Renaissance. This development is a system of knowledge based on the idea that humans are fundamentally pleasant, that humanitys deepest verities may be created through insight rather than reason, and that all of creation is predominantly unified. Transcendentalism became prominent among scholars and ministers in advocating the expansion of a national culture and social reform. It also served as a statue to debate world issues such as abolition of slavery, workers rights, womens suffrage, and freedom of religion. The most powerful piece of literature that was published during this time period was The Dial, founded in 1840 by Margaret Fuller and Ralph Waldo. These dispatches from Italy, played a major role in precipitating the Civil War. (Fleche, Andre) This served as an assembly for the publication of fiction, essays, and poetry by several foremost American Transcendentalist and American writers. The arts and literature movement, Romanticism took place based on a cultural revolution. Romanticism incorporated the principles of imagination, individuality, and spirituality. Against the strongly misconceived conception, Romanticism was not developed by love. Instead, it has been historically affiliated with narratives full of adventure and romance that stems from myths rather than stories based on historical events. However, the stories that were published during this time period do have a sense of realism to them due to the storylines being influenced by political, social, and economic changes. Dark Romanticism is a derivative of Romanticism. The gothic, the grim, and the unpropitious are just a few words to describe this fascinating movement that took place during the 19th century. These adjectives that are continuously embraced, helped to shape this movement into what is now one of the most popular sub-genres. Life was presented in the Dark Romantics as being colorful, yet dark, structured, yet impulsive, and predictable, yet paradoxical. Unlike the Romantics, the Dark Romantics set their stories based upon the wickedness and evil that is within man. They acknowledged both the good and evil in humans. Prominent Dark Romanticism authors during this time period were Nathaniel Hawthorne, Edgar Allen Poe, and Herman Melville. Nathaniel Hawthorne is known for several of his Dark Romantics, including Young Goodman Brown, The Ministers Black Veil, and The Scarlet Letter. The short story, Young Goodman Brown, is set through the streets of Salem (Norton Anthology 347) and tells of a man that sets out in woods filled with deepening gloom (Norton Anthology 349) where he is faced with his future by seeing the shape of evil (Norton Anthology 353). This short story is set as a Dark Romantic as Hawthorne goes over all the dark, and gruesome details of Young Goodman Browns travels. Another one of Hawthornes popular Dark Romantic tales is The Ministers Black Veil, published in 1832.This tale is set within a puritan town, where the natives are made aware of their sins. It was common for Hawthorne to use references to the Salem Witch Trails, as it is so that his great-great grandfather, John Hathorne, was a judge at the trial, which Hawthorne gained a great deal of inspiration from. This only further sets the eeriness of his stories apart from other authors of Dark Romantics. Authors during Hawthornes time period gained inspiration from Hawthornes dim works of literature. One of those authors is Herman Melville. Herman Melville is known for his novel Moby Dick. Melvil le published Moby Dick, a Dark Romantic, a year after The Scarlet Letter was published, in dedication to Hawthorne (Bolton 36). Not only did Hawthornes, The Scarlet Letter, have a long effect on Melville, but it also has a long-standing inclusion in high school and college American Literature syllabi (Bolton 37). This ensures that generations to come will continue to encounter Dark Romantic novelist like Hawthorne, and Melville. Another prominent Dark Romantic author during this time period is Edgar Allan Poe. Poe had many dark short stories, one being The Fall of the House of Asher. This story tells of a family that is falling apart as their house his literally falling around them. The first line of the story includes the adjectives, dull, dark and soundless (Norton Anthology 629). These words are used to describe an Autumn day. A day that should be full of color however, Dark Romantic author, Poe described it in as any dark author would. Poe uses this story along with many other o f his stories to not only express this sub-genre in words but also within music. The Fall of the House of Usher, is used to evoke music as a figure for both diseased sympathy and madness, says Sean Kelly. There is a loose vague connection between the words and the characters, that sets the dark, gloomy tone. Hawthorne, Poe, and Melville are all very influential Dark Romantics. They were able to acknowledge the existence of pain, sin, and evil within the lives of humans, and even formed a counterpoint to the Transcendentalists. With these authors use of dark adjective and symbols, they were able to portray works of literature that are categorized as Dark Romantics, allowing the authors to play a vital role in the American Renaissance. The American Renaissance period took place from approximately 1820-1865. During this time period, Transcendentalism, Romanticism, and Dark Romanticism began to flourish. However, the three had very different views of the world. Transcendentalists believed that God is present in every aspect of nature, Romanticists believed that intuition, imagination, and emotion are superior to reason, and the Dark Romanticists believed that spiritual facts lie beneath the appearance of nature. Although all of the differ, each one has a group of literary authors, such as Margaret Fuller, Ralph Waldo, Herman Melville, Nathaniel Hawthorne, and Edgar Allan Poe, that have made a difference in the world of literature.