Analysis Of The Foreign Exchange Market

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INTRODUCTION

One of the fundamental topics in the foreign exchange market is to know how information is reflected in the determination of prices. This question is also true for any topics in financial economics but it is all the more important in the currencies market, which is the largest market in the world.

The first searches about the correlation between the releases of macroeconomic data and the foreign exchange rate between two currencies were made in the early 1980s. Meese and Rogoff (1983) first try to demonstrate that exchange rates could not be explained by fundamentals. Another study by Frankel and Rose (1995) shown that, at short horizons, a driftless random walk characterizes exchange rates better than standard models based …show more content…

The forex market is made up of bank and nonbank foreign exchange dealers; individuals and firms conducting commercial or investment transactions; speculators and arbitragers; central banks and treasuries. The 2013 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity report, which is the most comprehensive source of information on the size and structure of global foreign exchange markets, showed that the trades in foreign exchange markets averaged $5.3 trillion per day in April 2013. The report also demonstrates that foreign exchange market is constantly growing, the daily volume being $4.0 trillion is 2010 and $3.3 trillion in …show more content…

This theory states that if the law of one price were true for all goods and services, the purchasing power parity exchange rate could be found from any individual set of prices. By comparing the prices of identical products denominated in different currencies, we could determine the real exchange rate that should exist if markets were efficient. To make a comparison, we should select a wide range of products and services but also determine the relative cost of living and inflation in each country, and then compare the quantity of currencies needed to buy these goods and

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