Foreign-Exchange Rate Theories
News of foreign exchange rate movements is always a highly awaited event across the globe. Due to a multitude of interconnected or independent factors, the rate at which a country’s currency trades against that of another country’s fluctuates constantly. The foreign exchange rate influences a business’s income, especially those with foreign business interests such as external market for products or sourcing raw materials (Znaczko, 2013). An increase in a foreign country’s currency means a business might have to incur more to purchase a similar quantity of products or services as before. These movements also present an opportunity to make profits by taking advantages of the gaps created by decreases or increases over a period of time. For these reasons, the need to predict future exchange rates for such types of businesses and individuals becomes vital.
The prediction of foreign exchange rates is not only aimed at establishing the value of foreign exchange but also to analyze events that are likely to affect the rates. As a result, there have been countless attempts over the years to develop theories that allow the correct determination of correct equilibrium values for Forex exchange rates (Znaczko, 2013). A host of approaches have been developed to predict the foreign exchange rate but the biggest concern for many is that they find the theories to be too complex and problematic to use. Additionally, the factors to be considered in adopting a given theory is also a major concern.
I believe that predictive accuracy should be the overriding consideration to be used in determining the accuracy of a theory. This is because the primary purpose of predicting is to determine the value that can come close to the real value and thus, the usefulness of a theory can only be established by its effectiveness in this respect. Nonetheless, due to the various factors that affect the exchange rates and the differences in systems used in the exchange markets, it is prudent to use several methods to determine the best fit for a specific local currency (Znaczko, 2013).
Despite many arguments that most foreign exchange theories developed are too problematic and difficult to use and thus should be expunged, I believe this would deny the necessity and importance of establishing the theories in the first place. Theories are meant to guide decision-making. Sound financial decisions are backed by an explicit framework by which those making them have a guiding plan. Suppose the theories were expunged, it would be correct to consider the decisions made in the foreign exchange market as unsound and unreasonable. Though they might not be as accurate as most would hope, expunging would mean that even the possibility of coming up with a lasting solution is completely closed.
Incorporating the foreign exchange theories in the curriculum will be important in continuing the provision of knowledge to economists who might eventually come up with the proper model in the future. Also, it helps to gain an understanding of the mechanisms behind the exchange rates. By learning these theories, economists can better understand issues and policies going in their country and foreign countries (Jackson et al., 2019). They can gain insight on how politics, weather among other variables affect the rates. The alternative of abandoning foreign exchange rates would put all the economists’ years’ work in vain, which would leave the prediction of foreign exchange rates thin. Besides, a proper model may not be invented immediately if the learning process was halted. It would mean stopping efforts already made which can deter the likelihood of ever coming up with a more accurate approach in the foreseeable future entirely.