International Money and Finance

Melvin's International Money and Finance offers a concise survey of international finance. The basics of the foreign exchange market and the balance of payments are presented, along with accessible discussions of the most recent research findings related to exchange rate determination. Topics range from the nitty-gritty of financing international trade to intuitive discussions of overshooting exchange rates and currency substitution. The Sixth Edition has been written in the same spirit as the first five-to provide a concise survey of international money and finance suitable for undergraduate and graduate economics courses, and MBA classes.

Preface

xi

(2)

To the Student

xiii

1 The Foreign Exchange Market

1

(24)

Spot Rates

1

(5)

Arbitrage

6

(3)

The Intradaily Activity

9

(4)

Central Bank Intervention

13

(2)

Black Markets and Parallel Markets

15

(2)

Foreign Exchange Trading Volume

17

(1)

Summary

18

(1)

Exercises

19

(1)

References

19

(1)

Appendix 1A: Exchange Rate Indexes

19

(3)

Appendix 1B: The Top Foreign Exchange Dealers

22

(3)

2 The Balance of Payments

25

(18)

Current Account

28

(2)

Financing the Current Account

30

(3)

Additional Summary Measures

33

(1)

Transactions Classification

34

(3)

Balance of Payments Equilibrium and Adjustment

37

(4)

Summary

41

(1)

Exercises

42

(1)

References

42

(1)

3 Past and Present International Monetary Arrangements

43

(24)

The Gold Standard: 1880 to 1914

43

(2)

The Interwar Period: 1918 to 1939

45

(1)

The Gold Exchange Standard: 1944 to 1970

46

(2)

The Transition Years: 1971 to 1973

48

(1)

Floating Exchange Rates: 1973 to the Present

49

(1)

The Choice of an Exchange Rate System

50

(5)

Optimum Currency Areas and the EMS

55

(2)

The Euro

57

(1)

Currency Boards

57

(2)

International Reserve Currencies

59

(4)

Composite Reserve Currencies

63

(1)

Multiple Exchange Rates

64

(1)

Summary

65

(1)

Exercises

65

(1)

References

66

(1)

4 Forward-Looking Market Instruments

67

(18)

Forward Rates

70

(1)

Swaps

71

(3)

Futures

74

(3)

Options

77

(4)

Recent Practices

81

(2)

Summary

83

(1)

Exercises

83

(1)

References

84

(1)

5 Exchange Rates, Interest Rates, and Interest Parity

85

(14)

Interest Parity

85

(4)

Interest Rates and Inflation

89

(1)

Exchange Rates, Interest Rates, and Inflation

90

(1)

Expected Exchange Rates and the Term Structure of Interest Rates

91

(3)

Summary

94

(1)

Exercises

94

(1)

References

95

(1)

Appendix: What Are Logarithms, and Why Are They Used in Financial Research?

96

(1)

What Are Logarithms?

96

(1)

Why Use Logarithms in Financial Research?

97

(1)

References

98

(1)

6 Foreign Exchange Risk and Forecasting

99

(14)

Types of Foreign Exchange Risk

99

(4)

Foreign Exchange Risk Premium

103

(4)

Market Efficiency

107

(2)

Foreign Exchange Forecasting

109

(2)

Summary

111

(1)

Exercises

111

(1)

References

112

(1)

7 International Investment and Capital Flows

113

(14)

Portfolio Diversification

113

(4)

Home Bias in International Investment

117

(2)

International Investment Opportunities

119

(1)

Direct Foreign Investment

120

(2)

Capital Flight

122

(1)

Capital Inflow Issues

123

(2)

Summary

125

(1)

Exercises

125

(1)

References

126

(1)

8 Prices and Exchange Rates: Purchasing Power Parity

127

(18)

Absolute Purchasing Power Parity

128

(6)

Relative Purchasing Power Parity

134

(1)

Time, Inflation, and PPP

135

(1)

Deviations from PPP

136

(4)

Overvalued and Undervalued Currencies

140

(3)

Summary

143

(1)

Exercises

144

(1)

References

144

(1)

9 Determinants of the Balance of Trade and Payments

145

(24)

Elasticities Approach to the Balance of Trade

145

(4)

Elasticities and J Curves

149

(1)

Currency Contract Period

150

(3)

Pass-Through Analysis

153

(4)

The Evidence from Devaluations

157

(1)

Absorption Approach to the Balance of Trade

158

(1)

Monetary Approach to the Balance of Payments

159

(8)

Summary

167

(1)

Exercises

168

(1)

References

168

(1)

10 Exchange Rate Determination

169

(20)

The Asset Approach

170

(3)

Sterilization

173

(2)

Sterilized Intervention

175

(1)

Exchange Rates and the Trade Balance

176

(2)

Overshooting Exchange Rates

178

(3)

Equilibrium Approach

181

(1)

Currency Substitution

182

(2)

The Role of News

184

(1)

Foreign Exchange Market Microstructure

185

(2)

Summary

187

(1)

Exercises

188

(1)

References

188

(1)

11 Import and Export Financing

189

(14)

Institutions

189

(4)

Executing Transactions

193

(2)

Letters of Credit

195

(3)

Bankers' Acceptances

198

(1)

An Example of Trade Financing

199

(1)

Summary

200

(1)

Exercises

201

(1)

References

201

(2)

12 Financial Management of the Multinational Firm

203

(14)

Financial Control

203

(2)

Cash Management

205

(3)

Intrafirm Transfers

208

(3)

Capital Budgeting

211

(2)

Summary

213

(1)

Exercises

214

(1)

References

214

(1)

Appendix: Present Value

215

(2)

13 The International Money Market

217

(22)

Origins of Offshore Banking

218

(3)

International Banking Facilities

221

(2)

Offshore Banking Practices

223

(4)

International Lending and Crisis

227

(3)

IMF Conditionality

230

(3)

Country Risk Analysis

233

(2)

Summary

235

(1)

Exercises

235

(3)

References

238

(1)

14 Macroeconomic Policy in the Open Economy

239

(16)

Internal and External Macroeconomic Equilibrium

240

(1)

The IS Curve

240

(3)

The LM Curve

243

(2)

The BP Curve

245

(1)

Equilibrium

246

(1)

Monetary Policy Under Fixed Exchange Rates

246

(2)

Fiscal Policy Under Fixed Exchange Rates

248

(1)

Monetary Policy Under Floating Exchange Rates

248

(2)

Fiscal Policy Under Floating Exchange Rates

250

(1)

International Policy Coordination

251

(2)

Summary

253

(1)

Exercises

253

(1)

References

253

(2)

Glossary

255

(8)

Index

263

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International Money and Finance

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