The following points highlight the top four theories of exchange rates. The theories are: 1. Purchasing Power Parity Theory (PPP) 2. Interest Rate Parity Theory (IRP) 3. International Fisher Effect (IFE) Theory 4. Unbiased Forward Rate Theory (UFR). 1. Purchasing Power Parity Theory (PPP): The PPP theory applies to commodities. There are two variants of the PPP: the absolute PPP [...]
There are three broad exchange rate systems—currency board, fixed exchange rate and floating rate exchange rate. A fourth can be added when a country does not have its own currency and merely adopts another country's currency. The fixed exchange rate has three variants and the floating exchange rate has two variants. 1. Fixed (or Pegged) Exchange Rate: This consists of [...]
The following points highlight the five main approaches used for determining exchange rates. The approaches are: 1. The Purchasing Power Parity Approach 2. The Balance of Payments and the Internal-External Balance Approach 3. The Monetary Approach 4. The Portfolio Balance Approach 5. Interest Rate Parity. 1. The Purchasing Power Parity Approach: Purchasing Power Parity (PPP) theory holds that in the [...]