1、INTERNATIONAL FISHER EFFECT,International Financial Management,1,Division of The Group Members,2,Definition,From Fisher Effect to International Fisher Effect,Present Currency,Future Currency,Nominal interest rate,But what?,Actual interest rate,3,Definition,Fisher Effect: Nominal interest rate = Actu

2、al interest rate + Inflation rate Combine PPP with Fisher Effect: Then we can get the International Fisher Effect: Or,1+r=（1+）（1+E(i)）,St/So(1Pd)/(1Pf)(1id)/(1if),St/So(1id)/(1if),（StSo）/So(idif)/(1if),4,Application,1.,Interest rate go high,expecting inflation rate go high,Currency devaluation,5,App

3、lication,2. In 2007 Japan, prime interest rate:0.5%, loan rate :around 1.5% Australia, deposit rate :6.25%,Huge Carry trade,Currency revaluation,More Hot Money flow in,CPI go high,Bank add deposit rate,Cause a vicious circle,6,Difference between IFE & RP,In rate parity, even in the reality trade, th

4、e arbitrator can have the observed value of all the four variables（Ft，St，id，if）, however in IFE, the investor can only get three of them（E（St+1）, and the forth variable is the expecting value can only be known after the investment. In the reality trade, IFE involve foreigner investment include excha

5、nge risk. However, the foreigner investment RP involved has no exchange risk.,7,Shortages,1.In short-term the actual data is very different from the theory. 2.Many currency has foreign exchange risk premium, kinds of uncovered arbitrage activities distort the money market. So in many situation the change of the exchange rate will higher than the difference of two countries interest rate 3.Assume the actual interest rate among the all countries is equal is not suit the reality. Actually, the more IFE make sense, the