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

Gdb.., Scenario: Brands and businesses in just about every industry are in...

Scenario: Brands and businesses in just about every industry are in a state of war with their competitors through promotions and marketing strategies. Majority of renowned brands

Government bonds, Government securities are the most important and un...

Government securities are the most important and unique financial instruments in the financial markets of any economy. Government of India Securities (GOI Sec) in

Downgrade risk, Market participants' measure the default risk of an i...

Market participants' measure the default risk of an issue on the basis of the credit ratings that the credit rating agencies assign to the issues. Once rating is

Define the price and earning ratio valuation method, Define the P/E valuati...

Define the P/E valuation method. Under what circumstances should a stock be valued using this method? The P/E ratio points out how much investor are willing to pay for each dol

Cash discount, I am trying to solve this formula: 2/10, net 30. In the bo...

I am trying to solve this formula: 2/10, net 30. In the book I am reading they have 2% x 360 ------- ------ = 2.04% x 18=36.72% 100-2% (30-10) I want to know how the

Cash flow yield analysis, A cash-flow yield is the discount r...

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its ca

What do you mean by cash flow ratios, Q. What do you mean by Cash Flow Rati...

Q. What do you mean by Cash Flow Ratios? Cash Flow Ratios: - Cash Flow Ratios are an additional device of cash management. Some important cash flow ratios are: (i) Cash Turn

LEVERAGE, Evaluate the importance of leverage in financial management of a ...

Evaluate the importance of leverage in financial management of a small scale company

Why do we need to learn finance, Why do we need to learn finance The qu...

Why do we need to learn finance The questions that you may thinking about right now are "Why do we need to learnfinance?  Shall we not leave it to people who are going to speci

Find out the current stock price, Great Pumpkin Farms just paid a dividend ...

Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely.  Investors require a 16 p

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