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International Financial Management: Collect Foreign Exchange Spot And Forward Rate Data And Interest Rate Data For Two Currencies; Examine Whether Cirp Holds

1645 words - 7 pages

International Financial ManagementCollect foreign exchange spot and forward rate data and interest rate data for two currencies; examine whether CIRP holds; analyse and discuss resultContent:3Introduction 4Collected data 4Analysis 7Discussion 9Conclusion 10References IntroductionThe theory of Purchasing Power Parity (PPP) is not appropriate to foreign exchange rate determination. One of the problems of using PPP is that it is primarilly focuses on differences of goods and service prices and it does not pay attention on international capital flows. After World War II, the foreign exchange market has spread quickly and it has enabled many foreign exchange transactions among countries, throughout the world and in any amount. This fact essentially supports the speculations about converting money from one currency to another dependent on the expected rate of return.The theory of covered interest rate parity was modeled to understand the relation between the spot exchange rate, the forward exchange rate and the interest rates in the two countries in a time period.I have conceived this essay to research how the czech investor (a funds of 100.000.000CZK owner) can reach and exploit the arbitrage opportunity in the Euroland. It was really problematic to find out information about above mentioned rates in the Czech Republic. There is no information about forward exchange rates. When I tried to contact banks they told me they couldn´t help me (the čsob bank operator, 30/10/07) or the other one said I knew more about it than she did (the čs bank operator, 30/10/07). Ultimately, I contacted the group ´patria online´, the membership has to be prepaid to get the information about foreign exchange market. I have dealt with them and got the free limited membership to find out the data for the essay - the information used in this work are found on Patricia online webpages. The Czech Crown is not common, large and frequently traded currency, I have used in this work the indirect quotation.This essay connects a theory with imagining a situation which poses a reality and is based on the facts (real foreign exchange rates and interest rates). First of all I will briefly explain the situation of the investor, then I will mention the collected data which will be analised afterwards according to imagining the situation of the czech investor. Finally, in discussion I will exhibit what the investor would expect if the data had been different.Collected dataThere is a czech person who wants to promote his own funds 100.000.000 Czech Crowns (CZK). He has deceided to invest either in CZK at domestic market or abroad to try to reach the covered interest rate abritrage opportunity. After some unsuccessful attempt to find data about forward rates he has joined the Patria online group. The membership costs 30,000CZK per year however it involves a lot of information and services - Patria Online group will provide him the information about the best rates...

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