CHAPTER 4

International Parity Relationship

CHAPTER OBJECTIVES

After studying this chapter, you should be able to:

  1. Explain how exchange rates are determined.
  2. Discuss the factors that influence the demand and supply of currency.
  3. Understand purchasing power parity and its various forms.
  4. Discuss interest rate parity and forward rate parity.
  5. Explain the international Fisher effect.
  6. Analyse the interrelationships between various parity conditions.
  7. Briefly discuss exchange rate forecasting.

Introduction

Exchange rates are important not only for business organizations but also for governments and individuals. Any change in exchange rates in either direction influences their cash flows. So, it is in everyone’s interest to know how exchange rates ...

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