Slide MGT411 Slide07

Chapter 10
Foreign
Exchange Rate
Determination

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Foreign Exchange Rate
Determination
• Exchange rate determination is complex.
• The following exhibit provides an overview of
the many determinants of exchange rates.
• This road map is first organized by the three
major schools of thought (parity conditions,
balance of payments approach, asset market
approach), and secondly by the individual
drivers within those approaches.
• These are not competing theories but rather
complementary theories.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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Foreign Exchange Rate
Determination
• Without the depth and breadth of the various
approaches combined, our ability to capture the
complexity of the global market for currencies
is lost.
• In addition to gaining an understanding of the
basic theories, it is equally important to gain a
working knowledge of:
– the complexities of international political economy;
– societal and economic infrastructures; and,
– random political, economic, or social events affect
the exchange rate markets.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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