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Currency Valuation and Further FX Strategy

Currency Valuation and Further FX Strategy, Foreign Exchange (FOREX, FX), Currency Markets Strategy, Interest Rate Swaps, Interest Rates Explained »

The original motivation for the participation in an interest rate swap was for the two parties to reduce their borrowing costs. This was achieved by both parties borrowing in the market which they has a comparative advantage in their cost of borrowing. They would then swap their interest rate commitments at a rate beneficial to both parties and for a specified period. However, as international markets became more integrated and informationally more efficient, scope for the arbitraging interest rate differentials between borrowers in different markets reduced significantly. Rather than the …

Currency Valuation and Further FX Strategy, Foreign Exchange (FOREX, FX), Currency Markets Strategy »

An ‘exchange rate’ is the price of one currency in terms of another currency. The price of the currency is determined by the demand for and the supply of that currency in the FX market. Any change in the factors that determine the demand and supply will result in a change in the exchange rate. Of the theories advanced to explain the exchange rate, and changes in the equilibrium rate, the purchasing power parity (PPP) hypothesis is the longest standing. Under the PPP hypothesis, countries with relatively higher inflation rates …