Effect on exchange rates, Financial Management

Assignment Help:

Effect on Exchange Rates

As we know, one of the most vital determinants of changes in relative exchange rates is the relative inflation rate. Assuming a free and open market, it is expected that an inflationary currency will depreciate against the currency having relatively stable inflation rate and the amount of depreciation will approximately equal the difference in inflation rates. The Purchasing Power Parity (PPP) theory says that spot exchange rates can shift to adjust perfectly to inflation differentials. The empirical evidence suggests that PPP gives improper reasoning for the fluctuations in the short-term exchange rate movements. In 1983, Adler and Dumas[6] discovered that concomitant inflation differentials revealed less than 5% of monthly exchange rate movements recorded in the 1970s. Although the short-term movements in exchange rates were not closely attached to the relative inflation shift, several researchers predicted that this relationship can be applicable to the longer period.

The non-existence of a strong short-term relationship can be related to the difficulty faced in calculating inflation rate and the relatively slow speed of adjustment for the change in the inflation rate observed in the goods markets. It is also possible that a foreign exchange rate, instead of adjusting exclusively on concurrent inflation rates also reflects the expected inflation rates. This suggests that current exchange rates are more affected by future expectations rather than the historical inflation rates.

 


Related Discussions:- Effect on exchange rates

Companies that would be best able to handle high debt levels, Give two exam...

Give two examples of types of companies that would be best able to handle high debt levels. Companies that manage local telephone service and those that manage natural gas deli

Explain the risk of the capital asset pricing model, Discuss risk from the ...

Discuss risk from the perspective of the Capital Asset Pricing Model (CAPM). The Capital Asset Pricing Model, or also known as CAPM, can be employed to calculate the suitable req

What circumstances would market to book value ratios, Under what circumstan...

Under what circumstances would market to book value ratios be misleading?  Explain. The Market to Book ratio is helpful, however it is only a irregular approximation of how li

Otcei index, OTCEI-COMPOSITE INDEX The OTCEI index is a pure price inde...

OTCEI-COMPOSITE INDEX The OTCEI index is a pure price index. The sum of the prices of all shares as of June, 1993 is in the denominator. The current prices are in the numerator

Mergers and acquisitions, Mergers and Acquisitions It is a Process of b...

Mergers and Acquisitions It is a Process of business combination. There are 3 forms of business combination: 1. M1.    M1 has the highest liquidity. This is the narrowest t

What is the debt security in the financial term, What is the debt security ...

What is the debt security in the financial term? Debt instruments are instruments which promise the payment of specified sums to the investor. Illustrations of debt instruments

Tests for consistency, Tests for Consistency The consistency of the ind...

Tests for Consistency The consistency of the index numbers have been tested over the years. The most important of these tests are: The time reversal test The

Define mergers affect communities, How do mergers affect communities? A: ...

How do mergers affect communities? A: While a locally controlled bank is merged into a bank headquartered somewhere else (an out-of-market merger), a few apprehension about the i

State the peter drucker rules for acquisitions, Peter Drucker gave five rul...

Peter Drucker gave five rules for acquisitions to be more successful. Contribution e.g. the acquirer can add value to the target organisation other than just providing mone

Fm, challenges that the finance manager face in fulfilling the managerial f...

challenges that the finance manager face in fulfilling the managerial function

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