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    Alkish Alex
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    The document discusses exchange rates and their movement. It outlines that exchange rates can be direct or indirect quotes, and discusses cross-exchange rates and bid/ask spreads. It also summarizes that the two main theories explaining why exchange rates move are purchasing power parity (PPP) and interest rate parity. Examples are provided to illustrate exchange rate calculations between the Indian rupee and Australian dollar.

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    IFM-2

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    The document discusses exchange rates and their movement. It outlines that exchange rates can be direct or indirect quotes, and discusses cross-exchange rates and bid/ask spreads. It also summarizes that the two main theories explaining why exchange rates move are purchasing power parity (PPP) and interest rate parity. Examples are provided to illustrate exchange rate calculations between the Indian rupee and Australian dollar.

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    © All Rights Reserved
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    2 views18 pages

    Ifm 2

    Uploaded by

    Alkish Alex
    The document discusses exchange rates and their movement. It outlines that exchange rates can be direct or indirect quotes, and discusses cross-exchange rates and bid/ask spreads. It also summarizes that the two main theories explaining why exchange rates move are purchasing power parity (PPP) and interest rate parity. Examples are provided to illustrate exchange rate calculations between the Indian rupee and Australian dollar.

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    © All Rights Reserved
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    of 18

    International Financial

    Management
    Session 2

    V R vi Kum r

    IFM-2 - 13 July 2023


    a
    a
    IFM-2 - 13 July 2023
    What is an Exchange rate?
    Lecture Outline

    • Direct and Indirect Quotes


    • Cross-exchange rates
    • Bid/Ask Spreads

    • Why do Exchange Rates MOVE?


    • TWO theories: PPP and Interest Rate Parity

    IFM-2 - 13 July 2023


    INR 10% A$3%
    A$ 5% INR 15%

    Quantas
    Air India

    Pay
    Pay 10%
    3%

    Borrow INR Borrow A$10


    560million million

    IFM-2 - 13 July 2023


    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    IFM-2 - 13 July 2023
    For instance, as per January 2023 data, the Big Mac costs
    ₹207 in India and $5.36 in the US, making the implied
    exchange rate 38.62. Since the actual exchange rate was
    81.72, the Indian rupee was said to be 52.7% undervalued
    as per the raw index.
    IFM-2 - 13 July 2023

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