3. Three reasons for foreign exchange
• Tourism
• International Trade
• International Investing
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.
7. Demand and Supply Theory
Determined by free market.
Role of domestic monetary authorities.
Factors determining demand are- economic growth, relative price
stability, and variety of competitive goods and services available for
export.
8. Factors affecting Foreign Exchange
Rates
• Differentials in inflation and interest rate.
• Current account deficits.
• Public debt.
• Terms of trade.
• Political stability and economic performance.
14. 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.
17. 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