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Authors: Brian Kettell
Published by: Centre for Islamic Banking and Finance
Published in: 1999

Abstract

The determination of exchange rates can be viewed from the viewpoint of both the long run and the short run. The approach to viewing exchange rates from the long run is known as the fundamental approach and is the subject matter of this case. The fundamental approach to the determination of exchange rates refers to those factors which render a given path for exchange rate as being sustainable over long time periods. It can be seen as providing a viewpoint as to whether the current exchange rate can be expected to be maintained when looking further ahead. It is useful to break down these long run factors into various categories: (1) International competitiveness; (2) Macro-economic balance; (3) Tariffs and quotas; (4) Preference for domestic versus foreign goods; and (5) Productivity. This case is suitable for undergraduate and postgraduate courses with an international finance, international banking or international business component. The themes covered also provide an analytical framework in which multi-national company decision making has to be analysed whether from the point of view of international finance, international marketing or international corporate strategy. It is particularly suitable for business situations where foreign exchange hedging and arbitrage decisions are being discussed.

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Abstract

The determination of exchange rates can be viewed from the viewpoint of both the long run and the short run. The approach to viewing exchange rates from the long run is known as the fundamental approach and is the subject matter of this case. The fundamental approach to the determination of exchange rates refers to those factors which render a given path for exchange rate as being sustainable over long time periods. It can be seen as providing a viewpoint as to whether the current exchange rate can be expected to be maintained when looking further ahead. It is useful to break down these long run factors into various categories: (1) International competitiveness; (2) Macro-economic balance; (3) Tariffs and quotas; (4) Preference for domestic versus foreign goods; and (5) Productivity. This case is suitable for undergraduate and postgraduate courses with an international finance, international banking or international business component. The themes covered also provide an analytical framework in which multi-national company decision making has to be analysed whether from the point of view of international finance, international marketing or international corporate strategy. It is particularly suitable for business situations where foreign exchange hedging and arbitrage decisions are being discussed.

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