1. Determination of exchange rates
3 major approaches

2. Factors affecting exchange rates
Current supply and demand flows in the foreign exchange market
Current events

3. Expectations about future exchange rate movements

4. Central Bank behaviour
Price stability
Low interest rate
Target currency value

5. Why do exchange rates move?
Effects over time of
Capital flows

6. Why do exchange rates move?
An understanding of how long-term economic fundamentals interrelate with short-term political or other factors is essential to understanding boyh why exchange rates move and the rationale behind the forecasts made by economists

7. Exchange rate of a freely floating currency
Viewed as having 2 constituents:
Economic performance( the currency in relation to other currencies)

8. Predictability of a currency vis-a vis other currencies
Short-term shocks are difficult both to predict and to quantify in terms of their likely impact on the exchange rates.

9. Predictability of a currency vis-a vis other currencies
Other short-term factors that influence exchange rates temporarily can be:
Banks open position/reserve requirements

10. Effect of capital flows

11. Balance of payments Current account balances Portfolio investments
Foreign direct investment

12. Parity conditions

13. Asset approach Relative interest rate Prospects foe economic growth
Supply and demand for assets
Outlook for political stability
Speculation and liquidity

14. Factors influencing spot and forward rates