Short Essay/Application

br International Money and Finance Exchange Rate of Mexican Peso with US Dollar

It is said , A currency 's value mirrors the fundamental strength of its underlying economy , relative to other economies ' A situation is given to determine the exchange rate of the Mexican Peso (MP ) against the US Dollar at the end of 2008 . The exchange rate derived is MP9 .5 1 . The formula used to determine this rate is by subtracting the Real Exchange Rate (MP0 .84 ) from the Spot Rate (MP10 .4 . You can get the Real Exchange Rate by

using this formula : (1 US inflation rate (1 Inflation rate difference of the two countries (1 Mexico inflation rate ' So the values given were put into the formula (1 .03 (1 .09 (1 .12 . The method used here is the Purchasing Power Parity and Exchange Rate Determination (PPP (Eun , C . S . et al . Ch 5 . slide 21 . Notice that the real exchange rate is less than 1 . According to PPP , if the real exchange rate is less than 1 , competitiveness of domestic country improves with currency depreciations ' Notice , too that the difference of inflation rate between Mexico and US is 9 . This means that MP should depreciate by 9 . This method , isn 't used alone to determine a nation 's economic stability (Eun , C . S . et al . Ch 5 . slide 21 22 . In forecasting the exchange rate , the Technical Approach studies the patterns and previous history ' that history repeats itself ' while the Efficient Markets Approach says the exchange rate will only change when new information arrives ' Both theories can help in determining the future exchange rate , but current data tells more and done by the Efficient Markets Approach that 's why its forecasts are unbeatable (Eun , C . S . et al . Ch 5 . slide 27 28 . The results of empirical data are the basis of currency trader 's expectations about the future value of the peso (Eun , C . S . et al . Ch 2 . slide 28

Works Cited

Eun , C . S , Resnick , B . G . 2001 .International Financial Management 2nd ed . Chapter 2 . The

McGraw-Hill Companies . [ HYPERLINK "http /www .mhhe .com /business /finance /er2e /ppt .mhtml http /www .mhhe .com /business /finance /er2e /ppt .mhtml ]

Eun , C . S , Resnick , B . G . 2001 .International Financial Management 2nd ed . Chapter 5 . The

McGraw-Hill Companies . [ HYPERLINK "http /www .mhhe .com /business /finance /er2e /ppt .mhtml http /www .mhhe .com /business /finance /er2e /ppt .mhtml ]

PAGE

PAGE 1...