ACCOUNTNG FRAMEWORK,

INTERNATIONAL FINANCE MARKET EXCHANGE RATE AND

PURCHASING POWER PARITY
 INTERNATIONAL FINANCE
 It is the branch of financial economics broadly concerned with monetary
and macroeconomic interrelation between two or more countries.

DYNAMICS:
GLOBAL FINANCIAL SYSTEM INTERNATIONAL MONETARY FUND BALANCE OF PAYMENTS
 The worldwide framework of
A set of intentionally agreed rules, A country is the record of all
legal agreements, institutions,
conventions and supporting institutions economic transactions between
and both formal and
that facilitate international trade. resident of the country and the rest of
informal economic actors.
the world.

EXCHANGE RATE FOREIGN DIRECT INVESTMENT

It is the rate at which one It is an investment in the form of controlling
currency will be exchange to ownership in business in one country by an
another entity based in another country.
 MAJOR COMPONENTS
FOREIGN EXCHANGE INTERNATIONAL MONETARY
It is the market in which money SYSTEM
denominated in one currency is Any country needs to have its
bought and sold with money own monetary system and an
denominated in another authority to maintain order in
currency. the system, and facilitate trade
and investment.
CURRENCY CONVERTIBILITY
Foreign exchange market assumes
that currencies of various countries
are freely convertible into other
currencies.
BALANCE OF PAYMENTS (BoPs)
It is systematic statement that
systematically summarizes, for a
specified period of time, the monetary
transactions of an economy with the rest
of the world.
INTERNATIONAL FINANCIAL MARKETS

It comprises of international banks,

eurocurrency, Eurobond market, and
international stock market.
 MARKET EXCHANGE RATE
 It is the market price of one currency in terms of another currency.

FLOATING EXCHANGE RATE FIXED EXCHANGE RATE

 when market exchange rate  A rate that the government sets
emerges as a result of interaction and maintains as the official
between the global supply and exchange rate.
demand for these currencies.
• It is how much it costs to exchange one currency for
another.
• Exchange rates fluctuate constantly throughout the week
as currencies are actively traded.
• This pushes the price up and down, similar to other assets
such as gold or stocks.
• The market price of a currency-how many U.S dollars it
takes to buy Canadian dollar for example-is different than
the rate you will receive from your bank when you
exchange currency.
EXAMPLE 1
The exchange rate from U.S dollar to British pound is
$1=£0.64.
As dollars is the single unit:
 multiply to change from U.S dollar to British pound
 divide to change from British pound to U.S dollar
 Calculate the value of $30 in
EXAMPLE 2 British pounds.
$30 x 0.64 = £19.20

Calculate the value of £57 in U.S

EXAMPLE 3 dollars.
£57 / 0.64 = $89.06
DRILL 1 €1 = £0.72
1. What is €85 in British pounds? €85 x 0.72 = £61.20
2. What is £50 in euros? £50 / 0.72 = €69.44
DRILL 2
Karen went on holiday to Germany and bought a camera for €320.

The exchange rate at the time she bought the camera was €1 = £0.72.

Jessica went to Morocco and bought the same camera for 3,018
Moroccan dirham.

The exchange rate at the time was £1 = 15.09 Moroccan dirham.

Find out the purchased the camera for the lower price and write down
the difference in the prices.
KAREN’S CAMERA
Exchange rate: €1 = £0.72
Using this exchange rate, multiply euros by 0.72 to calculate pounds:
€320 x 0.72 = £230.40

JESSICA’S CAMERA
Exchange rate: £1= 15.09 Moroccan dirham.
Using this exchange rate, divide dirham by 15.09 to calculate pounds:
3,018 / 15.09 = £200

 Jessica purchased her camera for the lower price.

 The difference in price was £30.40
 FORMULA:

P = EP^F
PURCHASING POWER PARITY (PPP)
where:

 The condition under which monies P = the domestic price

have the same purchasing power
in different markets.
E = the exchange rate
(units of domestic
currency per unit of
foreign currency)
P^F = the foreign price
Suppose Joe’s bookstore in New York charges $20 for a
book and Pierre’s bookstore in Paris charges 30.

If the dollar-euro exchange rate is 0.67 ($.67 = €1), then

the book priced at 30 in Pierre’s store in Paris costs the
same as a book priced at $20 in Joe’s New York store:

P = EP^F
= $.67 x 30
= $20
REASONS WHY PPP DOES NOT HOLD:
Goods are not identical
Information is costly
Shipping costs affect prices
Tariffs and legal restrictions on trade