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

What is the operating leverage effect and what causes it, What is the opera...

What is the operating leverage effect and what causes it?  What are the potential benefits and negative consequences of high operating leverage? The operating leverage effect i

Advantages and disadvantages of aggressive working capital, What are the ad...

What are the advantages and disadvantages of the aggressive working capital financing approach? An belligerent working capital financing approach typically results in a lower c

Working capital, W orking Capital Working capital is measured as th...

W orking Capital Working capital is measured as the difference among organization present assets and its current liabilities. Therefore, it is interpreted by some as a meas

Eurobond, Eurobond A corporate bond denominated in U.S. dollars or oth...

Eurobond A corporate bond denominated in U.S. dollars or other hard currencies and sold to investors outside the country whose currency is used. Eurobonds have become an impor

Financial derivatives, Do you provide plaigerism free solutions to question...

Do you provide plaigerism free solutions to questions or do you only tutor?

Calculate the future value of annuity, 1.  An investor is thinking of inves...

1.  An investor is thinking of investing in a recurring deposit scheme that offers an interest rate of 12% per annum. The investment that he is planning is for the higher education

Pay back period (pbp) , Pay Back Period (PBP) : This is the most popula...

Pay Back Period (PBP) : This is the most popular method employed by industrial practitioners for ranking investment projects. This is described as the "period required for a pr

Describe duties of the financial manager in a business firm, Describe the d...

Describe the duties of the financial manager in a business firm? Financial managers evaluate the firm's performance, determine what are the financial consequence will be if the

Explain main drivers for changing to ipsas, Question: PART A With th...

Question: PART A With the view to modernise its accounting system Government is considering adopting International Public Sector Accounting Standards (IPSAS) so as to maxim

Calculate the percentage of price change and regular bonds, Flying High Inc...

Flying High Inc. plans to raise $5,000,000 external financing through issuing bonds, and is considering two options: regular bonds and zero couple bonds.  The regular bonds will ha

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