PPP theory is highly applicable for some reasons. The purchasing power of the two currencies between the two countries can decide their currency exchange rate. This is actually to analysis the value of the currency to decide exchange rate. It captures the main direction of exchange rate movement so that to ensure the direction is correct. If a given fixed value, the difference between the two countries in purchasing power actually represents the difference between values of the two currencies.
Therefore, there is a risk, which may cause investors to remove investments causing a huge fall in value of the country’s currency. Policies that can address long term current account involves: 1. Currency Weakness- Depreciation in exchange rate might make exports more competitive and become cheaper to foreigners, which will increase demand for exports. This could also cause higher economic causing an increase in aggregate demand. 2.
For example, if markets see news which makes an interest rate increase more likely, the value of the pound will probably rise in anticipation. 4. Change in Competitiveness- If British goods become more attractive and competitive this will also cause the value of the Exchange Rate to rise. This is important for determining the long run value of the Pound. This is similar factor to low inflation.
Interest Rate Swaps - International Financial Management Introduction Interest rate swaps are a financial instrument that firms use to hedge themselves against interest rate exposures by exchanging interest rate obligations with each other (Smith, 2011). Interest rate exposure is the risk that a firm can make financial losses when the interest rates on the firm’s liabilities/assets move unfavorably (upwards and downwards respectively) against it within the financial market. It also refers to the opportunity for gain when interest rates in the financial market drop on these very same liabilities. The rationale behind such a derivative instrument is that, both parties to the financial arrangement have their own distinct priorities and requirements
The level of the share trading system is a key variable which shows the beat of monetary movement in a nation and together with different variables, for example, the genuine Gross Domestic Product, the unemployment rate, the expansion rate, the loan fee and the conversion standard give an outline of the macro economy. Stock costs have additionally been known not rather generally, prompting worries about conceivable "air pockets" or different deviations of stock costs from essential values that might
Inflation is all pervasive and is a universal phenomenon, the cause of which are subject matters of economics. It will define inflation as the rise in the prices of goods, leading to reduction in the value of money. The prices of goods and services increase with time. Hence, a lesser quantity of the same goods can be bought in future than in the present. This applies, to most products in general, though some products such as computers may defy the trend.
This situation is called as depreciation where a decrease in the value of a currency (inflation) as measured by the amount of foreign currency it can buy. The vice versa of this situation known as appreciation refers to an increase in the value of a currency as measured by the amount of foreign currency it can buy. Exchange rate and inflation rate are correlated. As the depreciation occur, it will boost up the inflation rate thus the local demand will be high. The cheaper export activities will increases demand for Mongolia exports.
This means that changes in the interest rate can have a big impact on consumption and investment spending. The interest rate tends to increase and decrease as the price level increases and decreases. This means that a higher interest rate raises the cost of borrowing and discourages investment and consumption spending, whilst a lower price level has the opposite result. In summary, lower interest rates make it cheaper to borrow. This tends to encourage spending and investment.
Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.