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Outline
Defining Exchange Rate
Measuring Exchange Rate Movements
Appreciation/Depreciation of a currency
Movements
Appreciation/Depreciation
Percentage change in value US $
New Value of Foreign Currency per unit of $ Old value of foreign currency per $
-------------------------------------------------- X 100
Old value of Foreign Currency per $
-------------------------------------------------- X 100
Old value of $ per unit of Foreign Currency
related to the price of foreign currency Supply of foreign currency positively related to the price of foreign currency Forces of demand and supply together determine the exchange rate
D $2.00 $1.50 D
50m 75 m Units of Foreign Currency ()
$2.00
$1.50 S
50 m 75 m Units of Foreign Currency ()
$1.6775
D
Units of Foreign Currency()
Exchange rate determination is complex. The following exhibit provides an overview of the many determinants of exchange rates. This road map is first organized by the three major schools of thought (parity conditions, balance of payments approach, asset market approach), and secondly by the individual drivers within those approaches. These are not competing theories but rather complementary theories.
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that exchange rates are determined by the supply and demand for a wide variety of financial assets:
Shifts in the supply and demand for financial assets alter exchange rates. Changes in monetary and fiscal policy alter expected returns and perceived relative risks of financial assets, which in turn alter exchange rates.
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are willing to hold claims in monetary form depends on an extensive set of investment considerations or drivers (among others): Relative real interest rates Prospects for economic growth Capital market liquidity A countrys economic and social infrastructure
Political safety
Corporate governance practices Contagion (spread of a crisis within a region)
Speculation
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Interest rates:
Higher domestic (real) interest rates attract investment funds causing a decrease in demand for foreign currency and an increase in supply of foreign currency.
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Economic growth:
Stronger economic growth attracts investment funds causing a decrease in demand for foreign currency and an increase in supply of foreign currency.
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Government intervention:
Maintain weak currency to improve export competitiveness.
returns to have a low currency value? Is it possible for a country with low real returns to have a high currency value?
Any query!!!