Assignment on Methods to calculate the exchange rate

Exchange rates Methods to calculate the exchange rate

Exchange rates are referred to as exchange the amount of currency with the currency of another country. In the field of the finance exchange rate are also known as foreign exchange rates. All the exchange rates of the states are exchanged through the price of the dollar, as the stock exchange market is run by the increase and decrease by the proportions of the dollar. Exchange rates obtained through the foreign exchange market, which supplies a vast range of buyers and sellers in the market. The economy of the country relais upon its exchange rate.

Flexible exchange rate Methods to calculate the exchange rate

The flexible exchange rate also is defined as a foreign exchange rate. Flexible exchange rates can be followed by the traders to think that the currency is worthful. Making these judgments for the traders relies upon many factors. The essential thing in the flexible exchange rate is the bank's interest rate and the debt level of any country, which weakens and strengthens the economy of the country.

Fixed exchange rate Methods to calculate the exchange rate

            Fixed exchange rate refers to as the currency rate of the country does not match with the price of the foreign exchange market, and the state has to maintain the value of their currency against the dollar or any other valuable currency.

How to calculate the exchange rates

The variations in the exchange rate always remain consistent in the week as currencies are trading actively. This trading can up-down the price and stocks and assists in the gold. For example, the rate of the American dollar is different from the rates of the Canadian dollar is changed from the bank from where you change the currency, and this the critical fact of the financial trilemma.

Finding Market exchange rates

The money is sold and buys from the businessman 24/7 in the week. It is necessary to change the currency into different currencies for trading purposes. The other currency should be used to buy British pounds. Using another money would make a pair. If U.S dollars are using in the exchange rate of British pounds, then they will make a pair of GBP/U.S.D.

Reading the Exchange rate

Reading the exchange rates before buying and selling the prices make you aware that what currency is available in what rate regarding the money they have, and in which currency they want to change their money. The rates of the currency tell you about how much cost is used in buying or selling the U.S dollar. There are many links available on the internet, and most of the websites are available, which gives you a detailed briefing on the current rates of all countries that are running in the live market.

Conversion speed Methods to calculate the exchange rate

When you go to the bank to change the currency into your required one, often banks do not provide you the same rate as they gave to the traders; the reason behind this the bank is taken his interest in these currencies. As they are earning profit through debit card ATM card services charges from their customers when they transfer the money from the bank. That’s why the difference would occur as compare to market rate and the exchange rate because they earn their profit from these extra charging. To calculate the discrepancies between the two exchange rates, take the rates and divide them with the exchange rate of the market and then multiply those frequencies with 100, and then you will get the markup percentage.

Methods of exchange rates

·         Interest Rate Party(IRP)

·         International Fisher

·         Purchasing Power Parity

International Rates Parity

            The Intrest Rate Parity is the theory in which the interest rate of two countries is equal, and difference is between the spot exchange rate and forward exchange rate. In foreign exchange markets, foreign exchange rates, spot exchange rates, and connecting interest rates the IRP play an essential role. The difference between the spot rate and forward rates is known as swap point. If the difference between them is affirmative then this is called forward premium, and if the difference is negative then this is called forward discount. To calculate the forward exchange rate on a future point in time, they understand the forward rates in fundamental interest rate parity to attribute to arbitrage.

International Fisher Methods to calculate the exchange rate

The difference between nominal interest rates of two countries that are directly proportioned to change the exchange rate their currencies at any required time; this effect is known as International Fisher Effect. The Economist of U.S.A develops this theory. The IFE is based on the future and current rates of nominal exchange rate, and this method is used to make predictions of future and spot currency movements. The IFE is the comparison between the other methods, and this used to predict and understand the actions and progressive increase in the prices of exchange rates.

Purchasing Power Parity Methods to calculate the exchange rate

            The purchasing power parity is the most famous macroeconomic analysis, which is used to contrast the economic productivity and standards of living among the countries. It is theory that measures the comparison between the currencies of two countries through an approach of “Basket of Goods.”A cording to this concept, the equilibrium of currencies is known as the currencies being at a part when the price of goods of basket was the same in both of the companies, in which the country is taking account in its exchange rates.

Covered Intrest Arbitrage Methods to calculate the exchange rate

The marked interest arbitrage is a strategy that is used by the investor to forward the contract to avoid the exchange rate risks in the business. This strategy provides favorable interest, and rate to invest the higher shares of the currency, and it minimizes the exchange risk with forwarding currency contact.

The covered interest arbitrage is only helpful when the hedging cost of the exchange rate decreases the risk without any addition in return generated by investing a higher amount of currency.

The returns would be very low on the covered interest rate arbitrage, with a low level of information, especially in the market of competitors. The advantage of communication technology is the reason behind this. it is proven through research that the arbitrage covered interest was inherently higher between the USD and the GBP when the standards of gold running slow according to the information.This will decrease the percentage and increase the amount while having consideration. The drawback of this strategy is associated with being complex while having a transaction with different currencies.

Some of the arbitrary strategies are quite uncommon, though the opportunity of irrational strategy, the investors demand the results quickly compensate the imbalance. The investor wants to take this strategy as a spot forward transaction in the market, and the goal behind this is to determine the minimal risk of the profit when the combinations make with different pairs of currency.

Example: the forward exchange rates are based on the interest rate, which takes out as a result of defferential between two currencies. As a simple example assume the currency y and currency x are the pairs in which the investor is doing trading in the spot market while the one year interest of the currency is 2%, and the x currency rate is 4%. Therefore, the coming year rate of the currency pair with x is 1.0916. This difference between the current price and coming rate is known as swap points. A currency which has the lowest interest rate will trade forward as a premium currency to increase the interest rate.

Currency Carry Trade Methods to calculate the exchange rate

            The currency carry trade is the most important strategy of the currency market. Applying this strategy exploits nothing to buy a high concede currency and funding the similar with a low concede strategy. This strategy mostly uses to buy the Australian, New Zealand, and Japanese currency just because the pairs of these currencies are very high. The first step to take out the carry trade, first identify which currency is dealing with high concede and which of the currency offers the lowest acknowledge.

This strategy becomes popular between the era of 200 and 2007 when it is dealing with japanies and Australian currencies with producing a high amount of interest, and annually with an average of 5%. It become the most favorable strategy among the businessmen who invest in the stock exchange. The carry trade strategy is risk-friendly because traders are most commonly willing to take the risk in the exchange rates, and it also provides low volatility. That’s why most of the traders invest huge amount with strategy because they have a lot of money at stake. And this will work happily and correctly if the currency does not move even a penny. Business investors only work with carrying trade either increasing the interest rate or extend the plan. Nowadays by using modern technologies, moving the money into the other countries without any problem the transaction can be done by merely clicking the button of the mouse. That’s why big investors do not hesitate to share their vast investing amount. The probabilities of the carry trade in the countries offer high rate interest to cut them and to shift monetary policy.