International Finance Essay Example | Topics and Well Written Essays - 1500 words - 10

International Finance - Essay Example The exchange rate is a variable of the International Fisher Effect, which states that the value of a currency of a nation whose interest rate is relatively higher is likely to depreciate against the value of currency of another country whose interest rate is relatively lower (Madura 2011, pp. 114-120). On that note, the paper presents the importance of the international finance; the factors influencing the exchange rate and discussion of the findings of the IFE test. The test will be conducted using the UK interest rate and the exchange rate between the UK and Greece’s currency from the year 2005 to 2014. The method adopted during the IFE test is a regression analysis (the coefficient of correlation) (Sowa & Acquaye 1999, pp. 2-10). The concept of the international finance can be strongly grasped after its elements are uncovered. The elements are the interest rate, the exchange rate, the inflation rate, export, and imports, etc. The following two theories are influenced by the mentioned factors: the International Fisher Effect (IFE) and the Purchasing Power Parity (PPP). The international finance refers to cross-border borrowing/lending of funds and any other transaction between the local and the foreign countries the leads to movement of funds, assets, and capital between the trading countries. The idea of Purchasing Power Parity contends that the prices of resembling products should be equal in different countries, when the currencies of the trading countries are converted into a single currency. There are two types of the purchasing power parity. That is, the absolute and relative purchasing power parity (Mankiw 2009, pp. 707-709). The theory of Absolute Purchasing Power Parity asserts that the real prices of commodities must be identical in all countries. Thus, the absolute Purchasing power parity is realizable when the purchasing strength of the local and foreign currency is alike, after the conversion of the currencies to foreign denomination, using the