Chapter 16

Ten Common Myths in International Finance

In This Chapter

arrow Looking at thoughts you may want to steer clear of

arrow Keeping international finance ideas in check

This chapter reminds you of some important points about international finance. These points imply ideas that you may be inclined to have, but that may be incorrect. Here you find ten short reminders of what not to think.

Expecting to Make Big Bucks Every Time You Speculate in Foreign Exchange Markets

You can lose big money in foreign exchange markets. Most speculative activity in foreign exchange markets is short term, with a time horizon of less than a year. There is high short-term volatility exists in exchange rates in spot foreign exchange markets. The term high emphasizes that the changes in exchange rates are greater than the changes in well-known fundamentals of exchange rates, such as inflation rates, interest rates, and growth rates. If you speculate using foreign exchange derivatives (Chapter 10), derivatives are not a guarantee for making profits; they only help you hedge against exchange rate risk.

Thinking You Can Buy a Big Mac in Paris at the Same Price as in Your Hometown

The Law of One Price doesn’t work in reality (See Chapter 9). You can’t buy a similar good, even one as standardized as a Big Mac, ...

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