 How to determine exchange rates under risk neutrality: A noteStefano Bosi, Patrice Fontaine and Cuong Le Van Economics Letters, 2017, vol. 157, issue C, 92-96 Abstract: The goal of this paper is to determine the exchange rates consistent with an equilibrium in the international assets and goods markets. We present a wealth model of a two-country economy where financial assets and goods are traded. We consider the case where the agents are risk neutral, a very common assumption in finance in order to have explicit solutions for prices, and, in particular, in international finance for exchange rates using the non-null Pareto optima. We show that the Pareto optima in the international assets and goods markets are found to coincide with the net trade allocations. More notably, under a no-arbitrage condition in the assets markets, we can define an exchange rates system for which PPP holds. We provide conditions to have a non-null Pareto optimum to compute the exchange rates. We give an example with a non-null Pareto optimum associated with the determination of the exchange rate. Keywords: International asset pricing; Returns on securities; Exchange rates; No-arbitrage conditions (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:157:y:2017:i:c:p:92-96 DOI: 10.1016/j.econlet.2017.05.015 Access Statistics for this article Economics Letters is currently edited by Economics Letters Editorial Office More articles in Economics Letters from Elsevier |
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