1. Foreign Exchange Rate Determination
Chapter 10
Foreign Exchange Rate Determination

2. 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.
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3. 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.