& O’Connell 2001) Therefore the PPP of country C with respect to the US dollar is as follows: Year PPP of country C with respect to US dollar 2003 1.02 2004 1.01 2005 1.01 2006 1.02 2007 1.01 The inflation rates for country D from 2003-2007 are as follows: (Mathis, Keat & O’Connell 2001) Therefore the PPP for country D with respect to the US dollar is: Year PPP of country D with respect to the US dollar 2003 0.99 2004 1.01 2005 0.98 2006 0.98 2007 0.99 Thus, these were the respective inflation rates of the countries A, B, C, D and their purchasing power parities calculated with respect to the US dollar. (b) The Purchasing Power Parity (PPP) Theory states that the exchange rate between the currencies of two countries is in equilibrium when their purchasing power is equivalent in both the countries. Let there be a fixed basket of goods and services and then let us determine the price of this common basket in both the countries. Then the exchange rate between the currencies of the two countries should be equal to the ratio of the price levels of the two nations. PPP theory also states that when a country is subject to inflation i.e. there is a continuous increase in the level of domestic prices of the country, there should be depreciation in the country’s exchange rate in order to restore PPP. (The University of British Columbia 2011) We can see from the data in the case study, that while country A has experienced inflation from 2003-2007, the exchange rate of its currency with respect to the US dollar has depreciated during the same period (except for 2007). Thus, the PPP theory held true for country A. In country B also, as it was experiencing inflation during 2003-2007, the exchange rates of its currency with respect to the US dollar has devalued over the period (except for 2005). Thus the PPP theory held true in the case of country B also. As country C was going through a period of inflation from 2003-2007, the exchange rate between its currency and the US dollar also underwent devaluation during the same period (except for 2005). Thus, for country C also, the PPP theory held good. In the case of country D, as it experienced inflation during 2003-2007, the exchange rate between its own currency and the US dollar remained the same in 2004 but devalued after that during the successive years. Thus the PPP theory also held good for country D. Therefore, the PPP theory held good for all the countries A, B, C, D. (c) The US dollar prime lending rate during 2002-2007 was as follows: Year US dollar lending prime rate 2002 4.67 2003 4.12 2004 4.34 2005 6.19 2006 7.96 2007 8.05 (Board of Governors of the Federal Reserve 2011) The
Treasury, Foreign Exchange and Financialization (1) The US inflation rates from 2002-2007 are as follows: (International Monetary Fund 2002-2007) The inflation rates of countries have been calculated according to the formula: Inflation rate of the country in year1 = (CPI in year 1- CPI of the previous year) / CPI of the previous year where CPI: Consumer Price Index The Purchasing Power Parity between the currencies of the countries and the US dollar have been calculated according to the formula: PPP between country A’s currency with respect to the US dollar = price of a basket of goods in country A/ price of the same basket of goods in the USA = [ initial price (100) + inflation rate of cou…
It has traditionally performed the role of converting one currency into another (Madura, 2009). It is consistent with the principles of market economy laid down by Adam Smith, according to which the value or price of a currency is determined by the market forces of demand and supply.
The Bretton Woods agreement was developed in New Hampshire in 1944. The major outcomes of the agreement were the formation of an International Monetary fund. The system proposed the introduction of a pegged foreign monetary exchange rate system that was adjustable.
the price of one currency in terms of another currency. The trading between currencies takes place in the foreign exchange market. Till today, FOREX is the biggest financial market in the whole world. The trading between the different banks like the central banks, the large banks, the multinational corporations, the trading between governments of different countries and other financial markets takes place in the FOREX market only.
Manufacturing operations in a country with highly unstable foreign exchange is ultimately exposed to foreign exchange risk. The depreciation or appreciation of exchange rate in any of the two countries, the domestic as well as international market, would have a significant impact on the firm's revenues and future cash flows.
The stakes involved with investments as posed by the currency vacillations have escorted many finance investment mediums to loan mostly in dollars and Euros (Young et al, 2008). Whilst this run through of escorting in crucial currency defends the investors, it budges the Foreign Exchange stakes to the finance organizations that implement the hard currency liabilities to fund the portfolios of the loans denominated in its domestic currency (Young et al, 2008).
While these finаnciаl innovаtions hаve аssisted business enterprises in hedging risk, they hаve аlso creаted conditions for heightened finаnciаl frаgility on аn internаtionаl scаle.
The rаpid growth of the derivаtives