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Theories of ForeignExchange Rate Movementand International ParityConditions
Mishu AgarwalMishu AgarwalLecturerLecturer--AKGIM AKGIM
 
Introduction
The phenomenon of exchange ratesmovement is an important issue ininternational finance and managers of multinational firms, international investors,importers and exporters and governmentofficials attach enormous importance to it.
 
The
ori
es
of
Ex
c
ha
ng
e Ra
t
e
The three theories of exchange ratedetermination are-
P
urchasing
P
ower 
P
arity (
PPP)
, which linksspot exchange rates to nations¶ price levels.
The Interest Rate
P
arity (IR 
P)
, which linksspot exchange rates, forward exchange ratesand nominal interest rates.
The International Fisher Effect (IFE
)
whichlinks exchange rates to nations¶ nominalinterest rate levels.
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