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Exchange rate
Introduction
Currencies are traded inforeign exchange
3. CURRENCY ARBITRAGE:
Currency arbitrage involves buying and selling currency pairs from
4. CURRENCY SPECULATION:
Currency speculation exists whenever someone buys a foreign currency,
DETERMINATION OF EXCHANGE
RATE:-
2.Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate
exhibits a rising currency value, as its purchasing power increases
relative to other currencies. During the last half of the twentieth
century, the countries with low inflation included Japan, Germany and
Switzerland, while the U.S. and Canada achieved low inflation only
later. Those countries with higher inflation typically see depreciation
in their currency in relation to the currencies of their trading partners.
This is also usually accompanied by higher interest rates.
4. Interest Rates :
Interest rates, inflation and exchange rates are all highly
correlated. By manipulating interest rates,central banks exert
influence over both inflation and exchange rates, and changing
interest rates impact inflation and currency values. Higher
interest rates offer lenders in an economy a higher return
relative to other countries. Therefore, higher interest rates
attract foreign capital and cause the exchange rate to rise.
EXCHANGE RATE QUOTES: There are several ways to quotes currency, but lets keep it simple .
A foreign exchange rate quoted as the domestic currency per unit of the foreign
currency. In other words, it involves quoting in fixed units of foreign currency against
variable amounts of the domestic currency.
For example, in the U.S., a direct quote for the Canadian dollar would be US$0.85 =
C$1. Conversely, in Canada, a direct quote for U.S. dollars would be C$1.17 = US$1.
DEFINITION OF 'INDIRECT QUOTE'
A currency quotation in the foreign exchange markets that expresses the amount of
foreign currency required to buy or sell one unit of the domestic currency. An indirect
quote is also known as a quantity quotation, since it expresses the quantity of
foreign currency required to buy units of the domestic currency. In other words, the
domestic currency is the base currency in an indirect quote, while the foreign
currency is the counter currency. An indirect quote is the opposite or reciprocal of a
direct quote, also known as a price quotation, since it expresses the price of one
unit of a foreign currency in terms of the domestic currency.
2.
3. ASSET MARKET APPROACH:Asset market approach argues that exchange rate are determined
by the supply and demand for a wide variety of financial assets
the asset market approach assumes that whether foreigners are
willing to hold claims in monetary from depends on extensive set of
investment consideration or drivers:
1. Relative real interest rate
2. Prospects for economic growth
3. capital market liquidity
4. countries economic and social infrastructure
5. Political safety
6. corporate governance practices
7. speculation
4. INTEREST RATE PARITY (IRPT):IRP theory states that exchange rate between currencies
is directly affected by their interest rate . Interest rate parity is one
of the most important fundamental economic relation relating
differential interest rate and forward exchange rate between a pair
of currency.
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