The different theories associated with the performance of foreign markets - Free Essay Example

Sample details Pages: 7 Words: 2064 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Purchasing power parity According to the Law of One Price identical goods should (under certain conditions) sell for the same price in two different countries at the same time. It is the foundation for purchasing power parity (PPP) theory, which relates exchange rates and price levels The purchasing power parity (PPP) theory is the measure of purchasing power of one currency alongside another currency after taking into account their exchange rate. The basic idea of PPP was popularized by Gustav Cassel in 1918 in his journal Abnormal Deviations in International Exchanges,. According to the Abnormal Deviations in International Exchanges the rate of exchange between two countries is primarily determined by the quotient between the internal purchase power against goods of the money of each countries. The general inflation will lower the purchasing power in all countries in a very different degree , and the rate of exchange should accordingly be excepted to deviate from their old parity in proportion to the inflation of each country. Don’t waste time! Our writers will create an original "The different theories associated with the performance of foreign markets" essay for you Create order There are two types of PPP. Absolute Purchasing Power Parity suggest that prices of the same basket of products in two different countries should be equal when measured in a common currency. Relative PPP describes the inflation rate. This describes that because of market imperfection, prices of the same basket of products in different countries will not necessarily be the same when measured in a common currency. Different versions of the Law of One Price and PPP Different versions of the Law of One Price and PPP Balance of payments model (MANGEMENT, Dragon Asset) This model holds that a foreign exchange rate must be at its equilibrium level the rate that produces a stable current account balance. A nation with a trade deficit will experience a reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilising the trade balance and the currency towards equilibrium. Like PPP, the balance of payments model focuses largely on tradable goods and services, while ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Such flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the Asset Market Model. Asset Market Model The explosion in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services. The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with asset markets, particularly equities. THE SUPPLY AND DEMAND THEORY The supply and demand theory, according to this one, the exchange rate is held to be determined by the supply and demand for foreign currencies. Actually, the supply and demand theory is not a theory, but instead a descriptive mechanism. To say that a rate of exchange is established by supply and demand is to tell how a rate is established, but to say a little about the factors that determine it or why the rate is at a given level and not at some other level. All of the forces, substantive, technical, and psychological, that have impact on a rate of exchange, must, by the very nature of the market itself, act by determining the demand for, and the supply of foreign exchange. What are Fundamental determinants of exchange rates? Foreign Exchange being a commodity likes any other commodities the exchange rates tend to fluctuate from time to time. There are various factors that cause the fluctuation in the rates of exchange. These factors can be divided into several following groups. These groups can affect the exchange rates on a short term as well as long-term basis. Fundamental Factors The fundamental factors include all such events that affect the basic economic and fiscal policies of the concerned government. These factors normally affect the long-term exchange rates of any currency. On short-term basis on many occasions, these factors are found to be rather inactive unless the market attention has turned to fundamentals. However, in the long run exchange rates of all the currencies are linked to fundamental causes. The fundamental factors are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc. Normally, other things remaining constant the currencies of the countries that follow the sound economic policies will always be stronger. Similar for the countries which are having balance of payment surplus, the exchange rate will always be favourable. Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse. Co ntinuous and ever growing deficit in balance of payment indicates over valuation of the currency concerned and the dis-equilibrium created can be remedied through devaluation. Political and Psychological factors Believed to have an influence on exchange rates. Many currencies have a tradition of behaving in a particular way for e.g. Swiss franc as a refuge currency. The US Dollar is also considered a safer haven currency whenever there is a political crisis anywhere in the world. Technical Factors The various technical factors that affect exchange rates Capital Movement The phenomenon of capital movement affecting the exchange rate has a very recent origin. Huge surplus of petroleum exporting countries due to sudden spurt in the oil prices could not be utilized by these countries for home consumption entirely and needed to be invested elsewhere productively. Movement of these petro dollars, started affecting the exchange rates of various currencies. Capital tended to move from lower yielding to higher yielding currencies and as a result the exchange rates moved. Relative Inflation Rates: It was generally believed until recently that one prima-facie direction for exchange rates to move was in the direction adjusted to compensate the relative inflation rates. For instance, if a currency is already overvalued, i.e., stronger than what is warranted by relative inflation rates, depreciation sufficient enough to correct that position can be expected and vice versa. It is necessary to note that exchange rate is a relative price and hence the market weighs all the relevant factors in a relative term, (in relation to the counterpart countries). The underlying reasoning behind this conviction was that a relatively high rate of inflation reduces a countrys competitiveness in international markets and weakens its ability to sell in foreign markets. This will weaken the expected demand for foreign currency (increase in supply of domestic currency and decrease in supply of foreign currency). Exchange rate policy and intervention: Exchange rates are also influenced in no small measure by expectation of changes in regulation relating to exchange markets and official intervention. Official intervention can smoothen an otherwise disorderly market but it is also the experience that if the authorities attempt half-heartedly to counter the market sentiments through intervention in the market, ultimately more steep and sudden exchange rate swings can occur. In the second quarter of 1985 the movement of exchange rates of major currencies reflected the change in the US policy in favour of co-ordinated exchange market intervention as a measure to bring down the value of dollar. Interest Rates: An important factor for movements in exchange rates in recent years has been difference in interest rates; i.e. interest differential between major countries. In this respect the growing integration of the financial markets of major currencies, the revolution in telecommunication facilities, the growth of specialized asset managing agencies, the deregulation of financial markets by major countries, the emergence of foreign exchange trading etc. having accelerated the potential for exchange rates volatility. Speculation Speculation or the anticipation of the market participants many a times is the prime reason for exchange rate movements. The total foreign exchange turnover worldwide is many a times the actual goods and services related turnover indicating the grip of speculators over the market. Those speculators anticipate the events even before the actual data is out and position themselves accordingly in order to take advantage when the actual data confirms the anticipations. The initial positioning and final profit taking make exchange rates volatile. These speculators many a times concentrate only on one factor affecting the exchange rate and as a result the market psychology tends to concentrate only on that factor neglecting all other factors that have equal bearing on the exchange rate movement. Under these circumstances even when all other factors may indicate negative impact on the exchange rate of the currency if the one factor that the market is concentrating comes out positive the curr ency strengthens. Summary of factor affecting exchange rates (JEFF, Madura) What are the different ways that a foreign exchange rate can be quoted? The foreign exchange can be quoted in two ways (YOURFOREXDIRECTORY.COM) Direct Quote A direct quote means indicates how many units of home currency traders need to buy one unit of foreign currency. In other words, its the home currency price of 1 unit of foreign currency. In a direct quote, the domestic currency is always listed as the base currency. For Example for a US trader to compare the British Pound(GBP), to say, the US Dollar, the pair will be listed as USD/GBP, which indicates how many US Dollar are required to buy one British Pound. Here, the USD is the base and the GBP is the counter currency. Indirect Quotes Indirect quote indicates how many foreign currencies are needed to purchase one unit of domestic currency. In an indirect quote, the foreign currency is the base currency and the domestic currency is the counter or quote currency. For example, if UK is the foreign market, then an Indirect Quote will be displayed as GBP/USD. This quotation is the reverse of direct quote which means that how many British Pound are needed to buy a single US Dollar. Difference between spot and forward exchange rates Spot Rate The foreign exchange transaction for immediate exchange is called Spot rate (immediate means within two days). The exchange represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract. Forward Rate A forward rate is a specific exchange rate at which two parties agree to trade currencies. The parties enter into a forward contract that specifies an exchange rate and a future date of exchange. Spread calculation for Spot market Income in currency market are made from the difference between the bid, which is the exchange rate at which a dealer or bank is willing to purchase a particular currency, and the ask, which is the exchange rate for which a dealer or bank is willing to sell a particular currency. The difference between the bid and ask is called the spread. Foreign currency broker or bank will quote both a bid and an ask for a particular currency. The average of the bid and ask (ask plus bid divided by two) is referred to as the midpoint price. The bid-ask spread is usually given as a percentage and it is calculated using the below formulae. (INVESTOPEDIA) Formulae for calculating spread ÂÂ   Bid Ask Dollar to Pound 0.64703 0.64719 Data taken 0n 09/09/2010 Then the bid-ask spread will be 100 ÃÆ'Æ’- (0.64719- 0.64703) / 0.64719 = 0.0247%, which is about 2.4 bps. ÂÂ   Bid Ask Pound to Dollar 1.54514 1.54552 Data taken 0n 09/09/2010 Then the bid-ask spread will be 100 ÃÆ'Æ’- (1.54552- 1.54514) / 1.54552= 0.0245%, which is about 2.4 bps. Spread calculation for Forward market The spread for a forward currency quote is calculated in the similar way as the spread for a spot currency quote. The distinctive factor linked with spreads for forward foreign currency quote is that spreads will increase as the length of time until settlement increases. Currency exchange rates would be expected to have a higher range of fluctuations over longer periods of time, which increases dealer risk. Also, as time increases, fewer dealers are willing to provide quotes, which will also tend to increase the spread.

One Easy Trick for Research Paper Topics on Fishing Unveiled

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o Personal Relationships. You can make the audience realize that you can understand their needs and that you can do something to solve their problems. List of Presentation Topics to Consider For Your Next Business Meeting

o Personal Relationships. You can make the audience realize that you can understand their needs and that you can do something to solve their problems. List of Presentation Topics to Consider For Your Next Business MeetingIn order to present a professional and interesting presentation, you need to consider the list of presentation topics and brainstorming about them. It will help to know the importance of each. You can then develop a short list of these topics and present it to your audience as part of your presentation.Each of the subjects mentioned in this article applies to different industries and occasions. Here are some examples of topics:o Business cards. Let your audience know that there is no business as common as yours. Make sure they have one. Make sure you remind them of it every time you meet with them.o Employment. Explain how you would be able to provide them with employment, for instance, in your insurance company. Your customers will be delighted to know that you have a solution for their problems and the satisfaction you will offer will convince them that you can make a better job for them.o Customer service. You should show your customers that you can be of help and interact with them in a constructive way so that they will return for more.o Communications. You will need to be very good at making presentations, since most of your audience are already familiar with Internet communications.o Reports. You can use this as an opportunity to show your expertise on certain topics, such as presentation reporting.

Analysis Of The Poem Hello, Morgana - 1534 Words

Hello, Morgana. A few hours before dawn, Arthur received word that Morgana was stirring, the last dose of belladonna finally wearing off. He wanted to be there when she woke, when she discovered where she was, to tell her himself what awaited her. A spiked bracelet engraved with archaic runes was now clasped on her forearm and locked by blood. His blood, and only he could release her from its bonds. Morgana sat on the cot, her head buried in her hands, wild hair spilling down her arms. She raised her head at his final approach on the other side of her cell bars with a group of faces known and unknown to her. Bloodshot eyes, haunted and confused, met his before the moment passed and the coldness returned upon recognition. She pulled herself to her feet with as much grace as her weakness would allow, slightly swaying in the balancing of her stance. I knew you had it in you, Arthur, she said with sarcastic pride, coming to stand before the rods of iron separating her from freedom. Uther would be proud of you. She presented her arm to him, tracks of crimson seeping from under the silver band, her lips twitching to force a crooked smile. The Hades Lock. Ancients told that no matter how powerful you were, once Hades put his hold on you, there was no escape from his realm unless he allowed it. I assume your blood sealed it. Arthur crossed his arms and nodded once, determined not to rise to the bait she dangled verbally in front of him. It had been like this between them

A Lesson In Teaching free essay sample

Love. Without it we could not reach ultimate happiness. The Corinthians said â€Å"If I have the gift of prophecy and can fathom all mysteries and all knowledge, and if I have a faith that can move mountains, but have not love, I am nothing† (13: 1-13 line 2). With love absent from our lives, we could not live life to the fullest. We must love, and be loved in return to obtain the good life. Love is a commitment that allows us to grow. The act of it introduces new life lessons and new feelings. As children we grow hearing all about love. In our minds we find true love in mom’s cookies and in our favorite toy. When we become more mature, we believe we better understand love; it’s not just another word for â€Å"like.† But when is it that we know we love someone? With love in our lives, we take risks. We will write a custom essay sample on A Lesson In Teaching or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Antigone sacrificed herself for her brother â€Å"†¦if I must die I say that this crime is holy; I shall lie down/ with him in death and I shall be as dear/ to him as he to me† (lines 55-58). Without second thought she was willing to die for devotion of her brother. This is an example that love is not selfish. When we love someone, they are what truly matters and putting those we care about before ourselves is proof of that. When we accept a challenge, such as commitment, we are accepting a step towards living the good life. When you hear definitions of love, you realize it is hardly defined the same by two people. It is looked upon differently by all eyes. While some of us might have the same overall conclusion of what love is, when put to words, we have different descriptions. Some find love in appearance, while others find it on a deeper level. I find that it goes past the surface of skin; love is family and true friends. When we’re born into a family, we automatically share a love that cannot be broken. And as we get older we really learn to love the people that share our blood. Love can not be a product of first appearance. It takes time and effort. My aunt and uncle met in the 8th grade, dated throughout high school and were married after college. They are still together to this day with a love so strong that nothing will break their relationship. I admire that. I think that anyone who has found an invincible form of love is most certainly living the good life. Whatever love may be defined as in your eyes, we can agree that it brings the greatest satisfaction.