StudentShare solutions
Triangle menu

Theories of Exchange Rate Determination - Essay Example

Not dowloaded yet

Extract of sample
Theories of Exchange Rate Determination

Infact before exploring various exchange rate models it is worth looking at how a wrong assessment of the exchange rate can cause difficulties where as in the past various corporations have dealt with and suffered the burnt of foreign currency transaction risk.
Millman(1990,1995) gives some interesting examples in his research work. One example he gives is of Lufthansa,the German airline which when contracted with Boeing to purchase aircrafts in the 1980's ,the value of the dollar was rising. The price of the aircrafts were set in dollars. Lufthansa feared that the dollar would strengthen and the cost in . Deutsche marks would increase the cost of the planes. Therefore it entered into forward contracts for the dollars required to pay for the planes.Contray to expectations the dollar weakened. Due to its wrong speculation forward contracts cost Lufthansa $140 to $160 million more for the aircrafts that they would have if they had bought the dollars on the spot market(Millman 1990). Although then there is no reliable way to counter forex risk in foreign markets it now worth looking at the various exchange rate models and how they have shaped forex and macroeconomic policies to avoid unexpected risks especially in financially volatile markets much affected by political repercussions and unpredictable events.

Introduction to forex theory and its determination
There are various theories of exchange rates which tend to produce various estimates of the exchange rate .This is not mainly due to the application of different theories however as varying econometric methods may also cause this variation and this has also caused doubt as to their efficacy and credibility as reliable estimates of a country's forex reserves. In this vein my paper will explore three of the existing theories pertaining to forecasting the exchange rate movements in the light of their empirical and micro foundations. This will be discussed according to their preconditions, implications and advantages and disadvantages.

PPP approach
Firstly we have the purchasing power parity approach to the exchange rate which has empirically found a lot of support and has influenced a lot of economic thought. The crux of this approach lies ...Show more

Summary

A thorough knowledge of exchange rate models and the relevant techniques for applying them is not only important for multinational firms and their trade transactions but also for the Macroeconomic policies of Governments. This is because if these models are not properly applied and understood this can give birth to international currency risk which is only of the risks most international firms face in connection with foreign exchange rates.1The problem arises when future payments or remunerations payable in a foreign currency depreciate in value before the foreign currency payment is received and is exchanged into the local currency of the firm…
Author : cheyenne26
Theories of Exchange Rate Determination essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Theories of Exchange Rate Determination"
with a personal 20% discount.
Grab the best paper

Related Essays

Power Purchase Parity
This paper looks at the definitions of exchange rates and relative pricing as well as their relationship in purchase power parity to discover if the hypothesis of purchase power parity is true. The purchase power parity hypothesis is based on the law of one price, that the equilibrium of trade between boundaries is constant.
14 pages (3500 words) Essay
Floating and Fixed Exchange Rate Regimes
These schemes have achieved at least some achievement as numerous countries in the area have experienced financial recovery with convenient inflation. Despite this development, troubles remain. The most of note issue is the monetary vulnerabilities as exemplified by the fall down of the Mexican peso.
4 pages (1000 words) Essay
The Dollar-Pound Exchange Rate
In today's market scenario, there is a tendency to control the forex market by both the current traders of the currency in addition to those who are trading in the futures market. Looking back at the 1931 devaluation of the pound, there is a large scale market pressure based on the fundamentals of the pound sterling against the dollar's market fundamentals (Marsh & Hallwood, Aug 2003).
10 pages (2500 words) Essay
Floating Exchange Rate
A floating exchange rate, also called s flexible exchange rate is "a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market" (Wikimedia Foundation, Inc). In the field of economics, we say that it is "determined by the private market through supply and demand" (Investopedia).
5 pages (1250 words) Essay
Exchange Rate Regimes
The use of one reference country, such as the USA, gives rise to asymmetries. By definition, the exchange rate is a relative price of two assets and, like other asset prices, is determined in a forward-looking manner in which expectations concerning the future course of events play a key role.
10 pages (2500 words) Essay
The Exchange Rate Regime of Thailand, purchasing power parity of Thailand
Malay, Mon and Khmer civilizations flourished in the reason prior to the arrival of ethnic “Tai”. Geographically the area of Thailand is 513,115 sq. km; equivalent to the size of France, or slightly smaller than Texas. Beautiful city of Bangkok is the capital of
16 pages (4000 words) Essay
Managing Exchange Rate Risk
The paper will focus on the current and historical changes in the exchange rates of USD/GBP and the suggestion for the requirement of hedging. United Kingdom has been selected as the country for doing business with the domestic currency GBP.
2 pages (500 words) Essay
Discuss the flexible price monetary model of exchange rate determination and its ability to explain foreign exchange movements. How realistic is the assumption that prices are fully flexible Does this model perform well when tested empirically
This was predominantly so because governments then thought that flows of capital in international trade was the sole determinant
5 pages (1250 words) Essay
Currency Exchange Rate
The importance of flexibility in the exchange rate for easier correction of imbalances current account has long been at the heart of international debate. Before the financial crisis World, these debates were focused on global imbalances and the role of exchange rate policies several major Asian and oil-exporting countries with external surpluses.
16 pages (3750 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation