6. Its commonly argued that high interest rate.Currency. Based on theoryInterest rate of Asia increase? Why?

Is the underlying reason logical?

According to the Fisher effect, the higher Asian interest rates would result in weaker Asian currencies, because the high interest rate reflects high expected inflation. One might argue that the underlying reason in this case in not logical if the interest rates were simply pushes up by indirect central bank intervention. That is, the high interest rates not reflect higher inflation in this case. Nevertheless, there would still be a concern about cash flow outward if investors became paranoid and want to move their money out of the country before others do. High interest rates signal that banks are demanding more compensation for making loans. Meanwhile, the Federal Reserve Board balances economic growth and inflation concerns. The Fed slows down the economy with higher interest rates to contain inflation. The federal funds rate affects all interest rates. The federal funds rate refers to interest charges on loans between banks for their reserves held at the Fed. The Fed reduces the money supply through open-market operations, which effectively increase interest rates. High interest rates are also associated with risk. Less creditworthy borrowers must make higher interest payments to compensate lenders for increased default risks. Fixed-income investments, such as bonds and certificates of deposit, pay out more money amidst high interest-rate environments. High interest rates may actually confirm high-inflation levels. Inflation decreases the purchasing power for all assets.

The Two Primary Causes of a High Inflation Rate In most cases, there are two primary drivers of a high rate of inflation in a nation's economy. These are:

Inflation Rate Cause #1: An increase in demand for goods relative to supply. When more people fight over fewer goods, the price increases. It is just as true for an entire country as it is for a lamp on eBay. We have seen an increase int he inflation rate, in part, because countries like China and India, which had virtually no industrial base a few generations ago, have billions of citizens poised to enter the middle class in the coming years. That means that the fixed, small supply of global copper, silver, gold, and other commodities will be bidded upon by a much larger group of potential buyers, driving up prices. In the past, a handful of industrialized nations, such as the United States, Canada, Australia, Great Britain, Germany, France, Italy, Russia, etc. were the only ones in the game when it came to requiring oil or other commodities. That time has passed. Inflation Rate Cause #2: An decrease in the value of each existing nominal unit of currency. Don't panic - it isn't nearly as complicated as it sounds. It's another way to say a government is printing money. If governments print money and depreciate their own currency, each dollar will buy fewer goods because dollars are less scarce. Think about it.

If a school teacher is suddenly earning $150,000 per year, she is going to be able to walk into a Maseratti dealer and buy a car. But Maseratti production is limited - the company can only churn out a fixed number of high-quality automobiles each year. As more money floods the economy, the relative income of different professions isn't likely to change, so lawyers who made $100,000 before the inflation increase might be making $300,000. That means the teachers won't be able to compete with the lawyers - still - and the price of Maserattis will double or triple. That is, the numbers on price tags changes but the relative purchasing power of the individual citizens hasn't changed. The teacher won't be able to afford the car but the lawyer will. The people who get hurt are those who have large bond investments and other fixed incomes such as Social Security.

Changes in domestic interest rates in one of the countries affect the foreign exchange rate as the demand for the currency that has had a change of interest rate will change. When Asian interest rate high, demand for Asian currency increase, that pull the exchange rate high. PPP suggests that the purchasing power of a consumer will be similar when purchasing goods in a foreign country or in the home country. If inflation in a foreign country differs from inflation in the home country, the exchange rate will adjust to maintain equal purchasing power. Asian Currencies in countries with high inflation will be weak according to PPP, causing the purchasing power of goods in the home country versus these countries to be similar. Before the Asian crisis, many investors attempted to capitalize on the high interest rates prevailing in the Southeast Asian countries although the level of interest rates primarily reflected expectations of inflation. The investors' behavior suggests that they did not expect the international Fisher effect (IFE) to hold. Since central banks of some Asian countries were maintaining their currencies within narrow bands, they were effectively preventing the exchange rate for depreciating in a manner that would offset the interest rate differential. Consequently, superior profits from investing in the foreign countries were possible. If investors believed in the IFE, the Asian countries would not attract a high level of foreign investment because of exchange rate expectations. Specifically, the high nominal interest rate should reflect a high level of expected inflation. According to purchasing power parity (PPP), the higher interest rate should result in a weaker currency because of the implied market expectations of high inflation.

7. During Asian Crisis...forward rate of Asian currency change? Do you think it increased or decreased? Why? The discount on the forward rate became more announced as the Asian interest rates increased. Due to interest rate parity, the larger interest rate gap causes a larger forward discount of the currency with the higher interest rate. In a foreign exchange situation where the domestic current spot exchange rate is trading at a higher level than the current domestic futures spot rate for a maturity period. A forward discount is an indication by the market that the current domestic exchange rate is going to depreciate in value against another currency. A forward discount means the market expects the domestic currency to depreciate against another currency, but that is not to say that will happen. Although the forward expectation's theory of exchange rates states this is the case, the theory does not always hold. Discount of forward rate increase due to change of Asian currencies because Asian currency depreciate over time so forward rate fix to buy a currency or sale a currency must give the speculator chance to earn abnormal return. 8. During Hongkong crisis..market. Why would stock prices decline...market? Why would some countries...than others? From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. Inflation was kept reasonably low within a range of 3.45.7%. The baht was pegged at 25 to the US dollar. On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies in which the U.S. dollar was the main component, against international speculators. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries. The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed. Without foreign reserves to support the US-Baht currency peg, the Thai government was eventually forced to float the Baht, on 2 July 1997, allowing the value of the Baht to be set by the currency market. On 11 August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring) procedures and establishing strong regulation frameworks for banks and other financial institutions. The IMF approved on 20 August 1997, another bailout package of $3.9 billion.

Figure: Hang Seng Index during Asian crisis The Hongkong dollar is tied to the Us dollar. Yet if the fixed rate is broken because of excessive Hong Kong dollars for sale, it could contain abrupt decline in the exchange rate. Some paranoid invertors began to sell Hong Kong dollar exchange for dollars but Hong Kong was able to use direct intervention to retain the exchange rate.

9. On Augustdeclined by more than 4%. Why doStock process? Was the market reaction rational? Would the effect different if the rubble plunge had occurred in an earlier period, such as 4 years earlier? Why? The impact of the Asia crisis on most countries of the former Soviet Union was widespread but relatively modest. Disturbances transmitted through capital markets were largely muted because, as a group, countries in the region have accumulated relatively little foreign debt (with most borrowing centralized by the government) and because domestic capital markets are relatively small, with only modest linkages to international markets. The trade impact took place largely through the fall in oil prices, which affected primarily the oil exporters (mainly Russia). The loss of export markets in Asian countries with substantially devalued currencies has yet to be felt, but is not expected to be a major factor for most countries. Overall, the main impact has been to adversely affect access to, and increase the costs associated with, borrowing on international capital markets. Nevertheless, growth for countries of the former Soviet Union is expected to continue to rise. However, in Russia and Ukraine, both of which had been actively borrowing on international capital markets, substantial pressures on domestic financial markets have developed as a direct result of contagion from Asia, which may have longer-term consequences for the transition process in these countries. The authorities in Russia successfully defended the exchange rate in late October/November 1997, and again in January 1998, by raising interest rates sharply, increasing reserve requirements on foreign exchange deposits, and intervening in the foreign exchange and treasury bill markets. A new exchange rate policy, which became effective on January 1, 1998, has accommodated a larger fluctuation margin to reduce the risk of speculative attacks. Once the authorities had demonstrated their willingness to raise interest rates to defend the ruble, speculative pressures subsided, allowing rates to move to more sustainable levels. The more recent attack on the ruble, which started in mid-May 1998, was due more to internal policy weaknessesespecially poor fiscal performancethan to a reassessment of emerging markets following the Asian crisis. Inadequate fiscal adjustment in Ukraine led to reliance on official short-term borrowing, which heightened the country's vulnerability to adverse external developments. As the Asian crisis developed, exchange market pressures started to build toward the end of October 1997 and forced the authorities to defend the exchange rate by widening the exchange rate band and increasing both interest rates and reserve requirements. These measures, together with additional external borrowing undertaken in early 1998 to shore up reserves, were insufficient to stem speculative pressures, and the central bank consequently had to tighten monetary policy further in 1998. The differences among the region's countries in the severity of interest rate and equity price movements illustrate the importance of sound domestic macroeconomic and structural policies in limiting their vulnerability to contagion from international financial markets. In Russia and Ukraine, weak follow-through in the implementation of structural and financial sector reforms, substantial dependence on short-term government borrowing, and (in Russia) a large fiscal deficit caused, in part, by chronically weak government revenues largely explain the intensity of the impact of the Asian crisis on them. The crisis has exposed many policy shortcomings in the region and made more apparent the need to address them urgently.

The decline in the ruble caused general paranoia about a crisis that could be transmitted to other countries. For example, a 50% decline in the value of the ruble means that Russian firms may be able to repay debts denominated in the dollar or other currencies. This could create problems for lenders in those countries, which could result in weak economies. The market reaction to the rubles plunge was probably more pronounced because it occurred during the Asian crisis when the level of paranoia was already high. 10.Normally, a weak local..economy. Yet, it appearedeconomies. Why do youAsian crisis? A currency with value that has depreciated significantly over time against other currencies. The long-term outlook for a weak currency is that it will continue to lose value due to fundamental weaknesses in the nation that issues this currency.
A weak currency like Asia tends to benefit domestic producers because a weak currency increases foreign demand for domestic goods and services. A weak currency can also hurt domestic consumers because domestic consumers would have to pay more for foreign goods and services and may have to pay more for domestically sold goods and services that have been obtained partially or entirely from foreign economies. Goods like oil will be more expensive for Asian consumers and thus decrease demand for many other domestic goods and services. That would have a negative impact on sales and consumption because domestic consumers are spending more of their income on the elevated costs of oil and other imported goods and services. That coupled with improved foreign demand for Asian goods and services make it quite difficult to tell just how an economy will be impacted. It truly depends on how severely weak the currency is. If foreign demand for goods and services results in more than enough sales and consumption to cover the potential slow down in Asian consumption by Asian consumers, then a weak currency will positively affect an economy. However, if a currency becomes too weak and foreign demand for goods and services fails to more than cover the slowdown in domestic consumption by domestic consumers, then it will result in negatively affecting an economy.

Asian weak currency adversely effects their economies. Because the currency is weak, domestic consumers looking to purchase and consume goods and services from foreign producers will have to pay more. Domestic consumers may even have to pay more money to buy goods and services locally if the domestic producers get their parts, components or entire product or service from foreign economies. If a domestic consumer wants to by a car that was manufactured domestically, with parts obtained domestically and was sold domestically, that consumer would most likely get a reasonable price for that good. But if the cars manufacturing process involved foreign economies, and if parts had to be purchased from foreign economies, then the price would be higher simply because of the various currency valuations. A weak currency hurts domestic consumers trying to buy and consume goods and services from foreign producers. A weak currency may even hurt domestic consumers trying to buy and consume goods and services from domestic producers to some extent. The weak Asian currencies caused concerns that the firms that borrowed foreign currencies would not be able to repay their debts. In addition, investors expected that the currencies could weaken further, which caused more capital outflows and a lack of funding support in Asia. While

non-Asian countries may consider purchasing imports in Asia due to the weak currencies, they may be worried that the firms in the Asian countries would go bankrupt and would not be unable to provide the products ordered Summary of ma part: According to the Fisher effect, the higher Asian interest rates would result in weaker Asian currencies, because the high interest rate reflects high expected inflation. One might argue that the underlying reason in this case in not logical if the interest rates were simply pushes up by indirect central bank intervention. That is, the high interest rates not reflect higher inflation in this case. Nevertheless, there would still be a concern about cash flow outward if investors became paranoid and want to move their money out of the country before others do. The discount on the forward rate became more pronounced as the Asian interest rates increased. Due to interest rate parity, the larger interest rate gap causes a larger forward discount of the currency with the higher interest rate. The Hong Kong dollar is tied to the U.S. dollar. Yet, if the fixed rate is broken because of excessive Hong Kong dollars for sale, it could cause an abrupt decline in the exchange rate. Some paranoid investors began to sell Hong Kong dollars in exchange for dollars, but Hong Kong was able to use direct intervention to retain the exchange rateThe decline in the ruble caused general paranoia about a crisis that could be transmitted to other countries. For example, a 50 percent decline in the value of the ruble means that Russian firms may be unable to repay debts denominated in the dollar or other currencies. This could create problems for lenders in those countries, which could result in weak economies. The market reaction to the rubles plunge was probably more pronounced because it occurred during the Asian crisis when the level of paranoia was already high The weak Asian currencies caused concerns that the firms that borrowed foreign currencies would not be able to repay their debts. In addition, investors expected that the currencies could weaken further, which caused more capital outflows and a lack of funding support in Asia. While non-Asian countries may consider purchasing imports in Asia due to the weak currencies, they may be worried that the firms in the Asian countries would go bankrupt and would not be unable to provide the products ordered