Changes in exchange rates, Financial Management

Assignment Help:

Q. Changes in exchange rates?

The law of one price proposed that identical goods selling in different countries should sell at the same price and that exchange rates relate these identical values. This directs on to purchasing power parity theory which suggests that changes in exchange rates over time must reflect relative changes in inflation between two countries. If purchasing power equality holds true the expected spot rate (S1) can be forecast from the current spot rate (S0) by multiplying by the ratio of expected inflation rates ((1 + if)/ (1 + iUK)) in the two counties being considered. In formula form S1 = S0 (1 + if)/ (1 + iUK).

This relationship has been found to embrace in the longer-term rather than the shorter-term and so tends to be used for forecasting exchange rates several years in the future rather than for periods of less than one year. For shorter periods forward rates are able to be calculated using interest rate parity theory which suggests that changes in exchange rates reflect differences between interest rates between countries.


Related Discussions:- Changes in exchange rates

Option-adjusted spread (oas) - total return, The horizon price ...

The horizon price can be determined by incorporating Option-Adjusted Spread (OAS) into a total return analysis. But this requires a valuation mo

Income statement, Income Statement A formal statement of the parts...

Income Statement A formal statement of the parts used in determining an organization net income that is called profit and loss statement. The several categories reported

Rejecting proposed projects when using internal rate of retu, What is the d...

What is the decision rule for accepting or rejecting proposed projects when using internal rate of return? Whenever the internal rate of return is equal or greater than to the

Optimal cash model, Optimal Cash Model: Cash Management is a bigger as...

Optimal Cash Model: Cash Management is a bigger aspect that involves range of functions that assist individuals and business to process their payments and receipts in an organ

Estimate sales price of gas, A proposal to extend the ABC Gas Company Ltd's...

A proposal to extend the ABC Gas Company Ltd's gas distribution network to the NOIDA industrial cluster, about 40 km east of Delhi, at distance of about 20 kms from the ABC's exist

State the term nature of financial instruments, State the term nature of fi...

State the term nature of financial instruments. Nature of financial instruments (securities): Financial instruments (termed as securities) can be classifies in two broad

Stock market indicators, Stock Market indicators: Stock indices can be ...

Stock Market indicators: Stock indices can be organized by weighting the sample of stocks. The stock indicators can be of four types: price-weighted average, volume-weighted av

What is adjusted basis, Q. What is Adjusted Basis? Adjusted Basis - Aft...

Q. What is Adjusted Basis? Adjusted Basis - After a taxpayer's basis in property is determined, it should be adjusted upwardto include any additions of capital to the property

Policy conflicts in debt and monetary management, Policy Conflicts in Debt ...

Policy Conflicts in Debt and Monetary Management: Co-ordination of operations is important so as to avoid differences in the policies of cash and debt management of the governm

Explain the political events in a host country, Discuss the different ways ...

Discuss the different ways political events in a host country may affect local operations of an MNC. Answer:  The answer can be organized based on the three types of political ri

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd