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Green Ppts
Green Ppts
economist 1918) , the theory states that in ideally efficient markets, identical goods should have one price The concept is founded on the law of one price; the idea that in the absence of transaction costs, identical goods will have the same price in different markets However, if it doesnt happen, then we say that purchase parity does not exist between the two currencies
$ 15
$ 30
At these levels, you can see that there is a purchasing power parity between both the currencies
between countries are not sustainable in the long run as market forces will equalise prices between countries and change exchange rates in doing so
prices in the US and India is not sustainable because an individual or a company will be able to gain an arbitrage profit
exchange rates , for purposes ranging from deciding on the currency denomination of longterm debt issues to determining in which countries to build plants
states that the exchange rate between the home currency and any foreign currency will adjust to reflect changes in the price levels of the two countries
and 1 % in Japan, then the dollar value of the Japanese Yen must rise by about 4 % to equalise the dollar price of goods in the two countries
ih
e0
et
Then
(1 ih ) et (1 ih ) i. e. et e0 t t (1 i f ) e0 (1 i f )
t
This theory states that premium or discount of one currency against another should reflect the interest differential between the two currencies The currency of the country with a lower interest should be at a forward premium in terms of the currency of the country with a higher rate
that the spot price and the forward, or futures price, of a currency incorporate any interest rate differentials between the two currencies assuming there are no transaction costs or taxes