Foreign exchange markets
1 US dollar= 0.750 euros   1 Euro= 1.3 US dollars
Three reasons for foreign exchange•    Tourism•    International Trade•    International Investing
What really is traded?• Bank deposits or bank transfers of deposits  denominated in foreign currency.• The foreign exchang...
Determination of Foreign    Exchange Rates
Demand and Supply TheoryDetermined by free market.Role of domestic monetary authorities.Factors determining demand are- ec...
Factors affecting Foreign Exchange                   Rates•   Differentials in inflation and interest rate.•   Current acc...
Foreign Exchange Market Equilibrium
Effect of Domestic Real Interest Rate
Effect of Domestic Inflation Rate
Effect of Foreign Interest Rate
Expectations
Purchasing Power Parity Theory Absolute PPP             Relative PPP • The rate of exchange between two   currencies in th...
Absolute Purchasing Power Parity
Relative Purchasing Power Parity
Criticisms of Purchasing Power Parity                    Theory•   Limitations of the Price Index•   Neglect of the demand...
Foreign exchange markets
Upcoming SlideShare
Loading in …5
×

Foreign exchange markets

962 views

Published on

My presentation on Foreign Exchange Markets and Determination of Exchange Rate in pptx format.

Published in: Business, Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
962
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
44
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Foreign exchange markets

  1. 1. Foreign exchange markets
  2. 2. 1 US dollar= 0.750 euros 1 Euro= 1.3 US dollars
  3. 3. Three reasons for foreign exchange• Tourism• International Trade• International Investing
  4. 4. What really is traded?• Bank deposits or bank transfers of deposits denominated in foreign currency.• The foreign exchange market exists as a network of large commercial banks trading foreign-currency-denominated deposits.• Legally speaking, physical exchange of money takes place only in the case of tourism.
  5. 5. Determination of Foreign Exchange Rates
  6. 6. Demand and Supply TheoryDetermined by free market.Role of domestic monetary authorities.Factors determining demand are- economic growth, relative pricestability, and variety of competitive goods and services available forexport.
  7. 7. Factors affecting Foreign Exchange Rates• Differentials in inflation and interest rate.• Current account deficits.• Public debt.• Terms of trade.• Political stability and economic performance.
  8. 8. Foreign Exchange Market Equilibrium
  9. 9. Effect of Domestic Real Interest Rate
  10. 10. Effect of Domestic Inflation Rate
  11. 11. Effect of Foreign Interest Rate
  12. 12. Expectations
  13. 13. Purchasing Power Parity Theory Absolute PPP Relative PPP • The rate of exchange between two currencies in the long run will be fixed by their respective purchasing powers in their own nations.
  14. 14. Absolute Purchasing Power Parity
  15. 15. Relative Purchasing Power Parity
  16. 16. Criticisms of Purchasing Power Parity Theory• Limitations of the Price Index• Neglect of the demand / supply approach• Unrealistic Approach• Unrealistic Assumptions• Neglects Impact of International Capital Flow.• Rare Occurrence

×