Exchange Rate

Theories
Crises
Determining
Exchange
Rates
Currency
Characteristics
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The relative price of goods determines
exchange rates

What is Purchasing Power Parity?
Exchange rate determined when the flow
of currency arising from current account
activities matches the flow of financial
account activity
What is the Balance of Payments Approach?
Exchange rates are determined by the
supply and demand for financial assets
What is the Asset Market Approach?
Makes a foreign party willing to hold
securities or undertake FDI in
DEVELOPED countries?
What is the level of real interest rates?
or
What are the economic growth prospects?


Makes a foreign party willing to hold
securities or undertake FDI in
UNDEVELOPED countries?
What are:
Prospects for economic growth
Capital market liquidity
A countrys economic and social infrastructure
Political safety particularly for FDI
Contagion
Speculation

During the early 1990s, this country is
offering investors a high rate of interest but
without the risk of devaluation
What is Thailand?
On August 26, 1998, this countrys central
bank gave up the fight to uphold the value
of the currency which fell by 50% in one
day

What is Russia?
During the Asian currency crisis, this
country experienced the failure of a major
corporation
What is Japan?
During the Asian currency crisis, this
countrys government had control on
lending and was able to maintain the
currency
What is China?
This countrys engineering and
construction firms lost contracts for the
improved infrastructure projects in
Thailand
What is the United States?
This is the oldest and most widely followed
exchange rate determination theory.
What is PPP?
Relative stocks of money or financial assets
play no role in exchange determination in
this theory.
What is the Balance of Payments
Approach?
This exchange rate determination theory
states that changes in monetary and fiscal
policy alter expected returns and
perceived relative risks of financial assets,
which in turn alter exchange rates.
What is the Asset Market Approach?

Most theories of exchange rate
determination have this theory imbedded
in them.
What is the Purchasing Power Parity
approach?
This theory enjoys widespread appeal as its
data are some of the most frequently
captured and reported of international
activity.
What is the Balance of Payments
Approach?

The focus on price and volume data to
determine past trends that are expected to
continue into the future.
What is technical analysis?
The spread of crisis in one country to
another country.
What is contagion?
This attribute of the asset market approach
is important to cross border investors for
the ease of buying assets and being able
to sell those assets quickly for fair market
value.
What is capital market liquidity?

This attribute of the asset market approach
is an important indicator of that countrys
ability to survive unexpected external
shocks.
What is a countrys economic or social
infrastructure?
In 1991 Argentina in an attempt to control
the value of the Argentine peso fixed the
value of the peso by adopting this.

What is a currency board.