International Investment Foreign Exchange Markets

The foreign exchange market is the largest financial market in the world .

(i)    Transactions take place through telephones, telexes or monitors.
(ii)    International banks are the main market makers in foreign exchange market.
(iii)    It is a 24 hour market.

In India, Reserve Bank of India, banks and business undertakings play an active role in foreign exchange market. The Reserve Bank of India plays a key role in day-to-day activities. Foreign exchange market is dependent on the relationship between interest rates, exchange rates and inflation rates. Bases on these three factors, there are theories to illustrate the interrelationship between interest rates, exchange rates and inflation rates.

(a)    Covered Interest Arbitrage Theory:

According to their theory, the forward and spot exchange rates ratio will be equal to foreign  and domestic interest rates ratio.

(b)    Expectation Theory of Exchange Rates:

According to this theory the, forward exchange rate will be equal to the expected spot rate.

(c)    Purchasing Power Parity Theory:

 The basic level of goods n two countries must be the same

(d)    Real Interest Rate Parity Theory:

This theory states that the nominal rate of interest refits the required rate of interest and the inflation rate.

For more help in International Investment Foreign Exchange Markets click the button below to submit your homework assignment