Two homogeneous stocks of physical capital are located in two different countries, separated by an "ocean." They are consumed by local residents, invested in a random production process yielding real returns, or transferred abroad. Under proportional transfer costs, trade, consumption, and capital imbalances are shown to be persistent. The heteroskedastic process for the relative price of capital in the two countries has a nonlinear, mean-reverting drift. Nevertheless, the conditional probability of the price moving from the parity value of unity is greater than the probability of it moving toward parity. The real interest-rate differential incorporates a simple risk premium. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Wben several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors ' portfolio choice and the equilibrium in the capital market. This article features two investors, with the same degree of impatience, one of them being logarithmic and the other having an isoelastic utility function. They face one risky constant-return-to-scale stationary production opportunity and they can borrow and lend to and from each other. The behaviors of the allocation of wealth and of the aggregate capital stock are characterized, along with the behavior of the rate of interest, the security market line, and the portfolio boldings. The two-investor equilibrium problem is as basic to financial economics as is the two-body problem to mechanics. Yet, to my knowledge, no complete description of the dynamic interaction between two investors

Bernard Dumas, External Currency Market Equilibrium and its Implications for Regulation of the Eurocurrency Market: Discussion, The Journal of Finance, Vol. 38, No. 2, Papers and Proceedings Forty-First Annual Meeting American Finance Association New York, N.Y. December 28-30, 1982 (May, 1983), pp. 468-470

Bernard Dumas, Session Topic: International Finance--Problems of Segmented Capital Markets: Discussion, The Journal of Finance, Vol. 32, No. 2, Papers and Proceedings of the Thirty-Fifth Annual Meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 512-515

A currency is not risky because devaluation is highly likely. If the devaluation were certain, there would be no risk at all. A weak currency can be less risky than a strong currency. A strong currency does not become risky because it has been used to denominate a firm's debt.