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 [...]
The following points highlight the techniques used to manage foreign exchange risk. The techniques are: 1. Doing Nothing 2. Pre-Emptive Price Variation 3. Risk Sharing 4. Maintaining a Foreign Currency Bank Account 5. Transfer Pricing 6. International Forfaiting 7. Discounting of Bills of Exchange 8. Money Market Operations and a few others. Technique # 1. Doing Nothing: This method suggests [...]
The following points highlight the five main theorems on foreign exchange rate determination. The theorems are: 1. Law of One Price 2. Interest Rate Parity Theorem 3. Purchasing Power Parity Theorem 4. Fisher Effect 5. International Fisher Effect. Theorem # 1. Law of One Price: The law of one price asserts that when there are no significant costs or other [...]