CHAPTER II: REVIEW OF THE LITERATURE
2.1 Introduction
This chapter reviews the literature on exchange rate, stock market, the relationship between exchange rate and stock price. Few of this literature, the majority of the studies discuss the relationship between stock price and exchange rate.
2.2 Exchange rate
The development of International Finance Corporation is an important trend of the world. Exchange rate is the most important international trade adjustment lever. As a national production of goods are calculated by the cost of national currency, to compete in the world market, the products cost must related to the exchange rate. The level of the exchange rate also directly affect the product cost and price and one of the most important factors of commodity competitiveness is about exchange rate in international markets.
Grennes (1975) investigates in the area of finance, the exchange rate is how much one currency is worth in terms of the otherbetween two currencies. It is the value of a foreign nation’s currency in terms of the home nation’s currency.
David P.（1971）in international business we can compare different commodities prices in different countries, because exchange rate play an important role in economic development.
Jorian(2008) Over the last decade, the world's exchange rate regimes has been hollowing, the result is to abandon the soft exchange rate peg, but the fixed rate of exchange and the floating exchange rate influence rises sharply.
In open economy, exchange rate is a very important economic variable and exchange rate fluctuation means that it has the broad influence to the economic field.
Mess and Rogodd (1984)in their recent find when the exchange rate changes, it will directly influences the i...
... middle of paper ...
...his country, like share, bound and so on. It will increase the demand for this country currency.
Irandoust(2002) concludes that no matter what kind of theory, can not explain various phenomena of foreign exchange markets, no one even said they use any theory can able to accurately forecast and determine the future trend of the foreign exchange market. Actually impact of a country's currency exchange rate has many factors, such as economic situation in countries, monetary policy, interest rate policy, stock market policy, and more paroxysmal event, because these factors have different effects on exchange rate, for that reason, increase the volatility of the foreign exchange market. The increase of financial market risk affected by exchange rate effects, at the same time provide investors with a healthy yield spread and increased profit space.
Saputo has production plants in Canada, America, Argentina and Australia, and many of their products are sold on the international market. Due to the fact that products are sold internationally, exchange rates affect the end price of products in different countries. For example, many of the raw materials used in the Argentine plants, such as milk, is imported from Canada. Therefore, the exchange rate between Canada and Argentina affects the cost of raw materials for the Argentina plant. If the Canadian dollar appreciates against the Argentine peso, the cost of raw materials will increase for the production plant, and vice versa.
More recently, Bahamani-Oskooee and Ratha (2007) gave a synopsis of the J-curve phenomenon, the expectations and effects that will occur under this phenomenon. They stated that due to lag structure, currency devaluation or depreciation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter J, hence the J-Curve phenomenon. This phenomenon tests the short-run dynamics of the post-devaluation or depreciation time-path of the trade balance. While exchange rate ...
The law of one price is ease to test in the same country, this is done through comparing the prices of goods; example, is the price of a meal the same in different cities within the same country (Port of Spain, Chaguanas, San Fernando) or within Trinidad’s sister island Tobago? The theory indicates that prices ought to be homogenous throughout. Conversely, the comparison of prices between different countries where different currencies are used tends to be a lot more difficult; however, this can still be done by looking at international currency markets where traders exchange currencies at some rate of exchange depending on the demand and supply of each c...
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
The coins made in gold, silver and bronze were traded during Roman Empire and the shortage of coins created a barrier for money circulation. However with the establishment of paper money, a sophisticated banking, global clearing system and electronic money, the global financial system evolved with a worldwide framework of legal agreements. In the Global Financial market, foreign currencies issued by the world, countries are traded by the buyers and sellers using currency exchange rates. Now a day, it is very common practices of companies in one country to raise capital in a foreign country by listing their stocks on major foreign exchanges given the growth of equity markets are becoming more globalized (SNHU, 2015).
Despite the fact that recent reports have shown that the Chinese currency is currently facing descending pressures, it is, however, likely to improve in the future because of the enhanced terms of trade, current account surplus that is growing, and high net saving. Another reason that will make the Chinese RMB to do well in the future it is because the currency has solid fundamentals and the economy of the country is significantly increasing at a higher rate than the GDP rates. Due to the growing Chinese economy to being the second largest economy, the Chinese currency yuan has been acknowledged by the International Monetary Fund (IMF) as a major global
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
Daniel M. Chin., Preston J. Miller. (1998). Fixed vs. floating exchange rate: A dynamic general equilibrium analysis. European Economic Review 42 (1998),
Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970s, after the collapse of fixed exchange rate regimes of the Bretton Woods system, excess volatility, nonlinear and disorderly movements in exchange rates became mysteries that traditional exchange rate theory cannot explain. Recent scholar concluded “no definitive evidence that economic variable can forecast exchange rate for currencies of nations with similar inflation rates" which is known as “the disconnect puzzle” from Meese and Rogoff’s studies (1983). Thus, this essay aims to explain why is it apparently so difficult to forecast exchange rate movements, and to provide evidence from the relevant literature and the reference of three popular fundamentals-based models, including Monetary Model and Mundell-Fleming Model.
The International Fisher Effect – Dealing with interest rate differentials and expected change in spot foreign exchange rates
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
The first of these exchange rates, nominal, is the number of units of a given currency that can purchase a unit of a given foreign currency (INSERT CITATION). When using this rate, countries are able to value of their own currency relative to one-another when trading in the foreign exchange market. This principle, however, is not exclusive to trading currencies. Similar to the nominal exchange rate, the real exchange rate uses goods and services in place of currency. As a result, it is defined as the amount of goods or services that can be traded in one country for a good or service in another country. Using this rate, countries are able to gauge the competitiveness of their goods and services in trading with any given country, making it a key factor for countries trading in the global economy.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...