Module 4 Written Essay Example | Topics and Well Written Essays - 750 words

Module 4 Written - Essay Example Latin American countries characteristically have high inflation rate, with some countries having as much as three digit percentage. In fact in a 70 year history of Argentina, the country averaged in excess of 200 percent inflation rate, Brazil on the other hand averaged 390 percent from 1980, and attaining a high of 6821 in the first quarter of this year. Venezuela rates are very high, a rate of 63.4 percent. The concept of Purchasing power parity (PPP) would imply that the currencies of these countries shall depreciate compared to the United States dollar so as to consolidate the purchasing power across the countries. According to Keown, Martin & Petty (2008), PPP reflects the relative value of purchasing a product in one county versus another. A high inflation rate has the effect of making their exports cheap while making imports expensive, thereby discouraging demand for Latin American imports and forces a downward pressure in their Latin American currencies. Depreciation of the c urrencies compensates the rising prices on Latin American exports when viewed by imports from the US and other countries. Interest rate parity exacts pressure on the forward rates to contain a large discount as a result of the high interest rate prevailing in Latin America, which shows a snag of hedging Latin American currencies. Hence, the option to hedge bears more sensibility if the expected rate of depreciation exceeds more than the forward rate. It is also important to factor in that certain remittance cannot be hedged anyway as a result the value of uncertainty in future remittances The forward rate of a Latin American currency would have a big discount; as a result the Latin American interest rate would be higher than that of the US. The discount operates as the prediction of the rate of change in the value of the Latin American currency given a lengthy period of time, which I represented by the forward