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The Microstructure Approach: New Details on Exchange Rates in the Short-Run

When it comes to exchange rate determination, keep an eye on research about Microstructure of Foreign Exchange Markets.This is a relatively new approach to exchange rate determination in the short-run. [more…]

How Foreign Exchange Swaps Work

The name swap suggests an exchange of similar items. Foreign exchange swaps then should imply the exchange of currencies, which is exactly what they are. In a foreign exchange swap, one party [more…]

The Challenges of Creating a Common Currency

The introduction of the euro in 1999 may have been the most interesting event in international finance for a long time. It doesn’t happen every day that a number of countries give up their own currency [more…]

Top Ten Traded Currencies of the World

Considering time differences around the world, chances are that you can trade currencies 24 hours a work-day in the American, European, or Asian markets. There are more than 190 countries in the world [more…]

Working with Exchange Rates: Common Definitions and Predictions

There are some basic definitions in international finance which you should remember. Additionally, knowing the long-run relationships between macroeconomic fundamentals and exchange rates help you predict [more…]

Key Issues about the International Monetary System

The international monetary system is a way for people to conduct business with each other from different parts of the world. The system covers types of money from different countries and the resulting [more…]

Ten Important Points to Remember about International Finance

The following list reminds you of some important points you should remember about international finance. These points are not explained in great detail; here you find short reminders. [more…]

Ten Common Myths in International Finance

Following are ten short reminders of what not to think about international finance. These points imply ideas that you may be inclined to have, but that may be incorrect. [more…]

The Home Bias in Trade International Finance Puzzle

The home bias in trade puzzle refers to the concept that people have a strong preference for consumption of their home goods. Empirical evidence indicates that, within a country trade is much larger than [more…]

The Home Bias in Equity International Finance Puzzle

The home bias in portfolio puzzle refers to the concept that home investors prefer to hold home equities. Most economic models assume that investors take advantage of risk sharing and potential gains in [more…]

The Feldstein–Horioka International Finance Puzzle

The Feldstein–Horioka puzzle of international finance refers to the concept that savings and investment are highly correlated at the country level. In the absence of transaction costs and other frictions [more…]

The Consumption Correlation International Finance Puzzle

The consumption correlation puzzle refers to the concept that consumption is much less correlated across countries than output. In a complete market world in which agents are able to exchange every good [more…]

The Exchange Rate Disconnect International Finance Puzzle

The exchange rate disconnect puzzle refers to the weak short-run relationship between the exchange rate and its macroeconomic fundamentals. In other words, underlying fundamentals such as interest rates [more…]

The Purchasing Power International Finance Puzzle

The purchasing power puzzle is an example of the exchange rate disconnect puzzle. According to the purchasing power parity (PPP), changes in exchange rates should reflect inflation differentials between [more…]

Market Imperfection Explanations for Exchange Rate Puzzles

There are several famous puzzles that relate to market imperfections, and these puzzles require a bit of explanation. Some of the basic assumptions about markets may not hold in foreign exchange markets [more…]

What Is an Exchange Rate?

An exchange rate (or the nominal exchange rate) represents the relative price of two currencies. For example, the dollar–euro exchange rate implies the relative price of the euro in terms of dollars. If [more…]

What Determines (Or Changes) Exchange Rates

You may know today’s dollar–euro exchange rate. But it will be something else next year. How do you predict what the exchange rate will be? Which factors are helpful in predicting the change in exchange [more…]

Does the Type of Money Matter for the Exchange Rate?

A close relationship exists between the type of money and the exchange rate regime. A monetary system based on a metallic standard such as the gold standard leads to a fixed exchange rate regime. For a [more…]

Which International Monetary System Is Better?

Economics is all about tradeoffs, and there’s no such thing as a flawless international monetary system. All systems have their benefits and costs. Any variety of a metallic standard, such as the gold [more…]

Is the Euro-Zone an Optimum Currency Area?

One of the most interesting developments in international finance took place with the introduction of the euro in 1999. At the time of its introduction, 11 European countries [more…]

The Do’s and Don’ts of International Finance

Some absolutes and some falsehoods arise in the subject of international finance. You definitely need to know that macroeconomic fundamentals such as inflation rates, exchange rates, and growth rates affect [more…]

Basic International Finance Equations to Remember

International finance is a subject based on numbers. And, with that comes calculations. Calculating the fundamentals of international finance puts the subject in perspective and gives it a visual component [more…]

International Finance For Dummies Cheat Sheet

International finance is an ever-changing subject. It puts you at the cutting edge of the financial world and gives business a global perspective. Keeping current with the exchange rates and understanding [more…]

The Role of Multinational Firms in Foreign Exchange Markets

The term multinational firm refers to a wide range of domestic firms that are engaged in business with foreign countries in different ways. One point to remember is that, independent of the type of foreign [more…]

The Roles of Speculators and Central Banks in Foreign Exchange Markets

Speculators and central banks are important participants in foreign exchange markets. Speculators invest in assets denominated in different currencies and, therefore, buy or sell currencies. Central banks [more…]

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