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Homework answers / question archive / Distinguish between factors affecting the exchange rate in the long run and in the short run
Distinguish between factors affecting the exchange rate in the long run and in the short run. Explain a case of investing in a business in a foreign country and what are the foreign exchange factors you would consider while making this investment.
The determination of foreign exchange rate play a vital role in the marinating the exposure of the BOP accounts of the nation, As such the factors inflicting the f the interest in Both the long run and the short run
Short Run factors Influencing
|
No |
Factors |
|
1 |
Differences in the interest rate prevailing in the economy |
|
2 |
Equalization of the short run rates across the cross border transaction |
|
3 |
Domestic Interest rates – Inversely proportional to the spot exchange rate |
|
4 |
Relative movements In the base currency value |
|
5 |
Foreign Interest rates = Directly proportional to the spot exchange rate |
|
6 |
The changes in the expected future spot exchange rates |
In the long Run the following factors impact the exchange rate
|
No |
Long run factors |
|
1 |
Influence of the law of one price on the exchange rate . |
|
2 |
The Purchasing power parity between the nations currency |
|
3 |
The changes in the inflation influencing the relative PPP in turn |
|
4 |
International Fisher effect also influences the exchange rate in the long run |
While considering investments in a foreign nation ,the following factors must be considered
|
No |
factors |
Description |
|
1 |
The prevailing Interest rates in the regional economy |
· The prevailing interest rates determines the fluctuation so of the interest rates in the short run . |
|
2 |
The exchange rates |
· The exchange rates between the pair of the currency determines the exposure on the position of the FCY taken |
|
3 |
The rate of the inflation of the domestic currency |
· The inflation rate in the currency determines the expected future sport exchange rate of the currency |
|
4 |
The tax rates prevailing and the Tax Structure in the country |
· The tax structures and the implication the investment portfolio is subjected to[WU1] in the foreign nation |
|
5 |
The liquidity of the target countries currency |
· The liquidity of the currency traded , as more is the liquidity the lesser will the spread between the Bid ask spreads of the currency pairs |
