Balance and Four way equivalence model: Difference between pages

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1. ''Banking.''
A model that proposes a number of related conceptual linkages between differences in:


The balance in a bank account reflects all items that have been deposited into and paid out of the account.
(i) Interest rates;


(ii) Spot and forward foreign exchange rates;


:<span style="color:#4B0082">'''''Example 1: Overdrawn account becomes balance in our favour'''''</span>
(iii) Expected inflation rates;  and


:We have an overdraft of £50k at the start of April.  
(iv) The expected change in spot foreign exchange rates.


:The balance at the start of a period is known as an opening balance. In our example it is £50k.
:So we owe £50k to the bank.


The related individual linking theories are:


:We deposit £60k into the account during the month of April.
#Interest rate parity theory - linking interest rates & spot and forward foreign exchange rates.
 
#The Fisher Effect - linking interest rates with expected inflation rates.
:This repays our overdraft, with some cash left over.
#Expectations theory - forward foreign exchange rates and future out-turn spot foreign exchange rates.
 
#The International Fisher Effect - interest rate differentials and expected change in spot foreign exchange rates.  
:At the end of April, our bank account now has a positive amount in it, of:
#Purchasing power parity theory - inflation rate differentials and expected change in spot foreign exchange rates.
 
::-50 + 60 = 10
 
:We have £10k cash in our bank account at the end of April.  
 
 
:The amount at the end of a period is the closing balance. In our example the closing balance is £10k.
 
 
:<span style="color:#4B0082">'''''Example 2: Closing overdrawn balance in favour of the bank'''''</span>
 
:Our opening bank account balance for the month of May is £10k cash.
 
:So the opening cash is £10k.
 
 
:We pay £30k out of the account during May.
 
:Opening balance + deposits - withdrawals = Closing balance
 
::+10 - 30 = -20
 
:This is an overdraft of £20k at the end of May.
 
 
:We have a closing overdraft balance of £20k.
 
 
 
2. ''Accounting.''
 
The balance in a financial account reflects all items that have been posted to the account.  




== See also ==
== See also ==
* [[Book]]
* [[Carry trade]]
* [[Cash flow]]
* [[Expectations theory]]
* [[Cleared balance]]
* [[Fisher Effect]]
* [[Flow]]
* [[Interest rate parity]]
* [[Inflow]]
* [[International Fisher Effect]]
* [[Ledger]]
* [[Model]]
* [[Ledger balance]]
* [[Purchasing power parity]]
* [[Outflow]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:Knowledge_and_information_management]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Identify_and_assess_risks]]

Revision as of 21:06, 4 July 2022

A model that proposes a number of related conceptual linkages between differences in:

(i) Interest rates;

(ii) Spot and forward foreign exchange rates;

(iii) Expected inflation rates; and

(iv) The expected change in spot foreign exchange rates.


The related individual linking theories are:

  1. Interest rate parity theory - linking interest rates & spot and forward foreign exchange rates.
  2. The Fisher Effect - linking interest rates with expected inflation rates.
  3. Expectations theory - forward foreign exchange rates and future out-turn spot foreign exchange rates.
  4. The International Fisher Effect - interest rate differentials and expected change in spot foreign exchange rates.
  5. Purchasing power parity theory - inflation rate differentials and expected change in spot foreign exchange rates.


See also

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