Assignment of Future Exchange Rate Movements

1. How is percentage changes in a currency’s value measured? Illustrate your answer numerically by assuming a change in the Thai bath’s value from a value of $.022 to $.026.

The way to calculate the percentage changes is as follow:

Percentage change = [(St-St-1) / St-1] x 100

St = after rate

St-1 = before rate

Assuming a change in the Thai bath’s value:

St = after rate = $.026

St-1 = before rate = $.022

Percentage change = [(St-St-1) / St-1] x 100

= [($.026-$.022) / $.022] x 100

= 18.18%

The value of Thai ฿ increases by 18.18% against U.S. $.

2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors?

The basic factors that determine the value of a currency are the demand for a currency and the supply of a currency. A high or low level of demand for a domestic currency increases or decreases the currency’s value in front of the foreign currency, while a high or low level of supply of a domestic currency decreases or increases the currency’s value in front of the foreign currency. In equilibrium, the demand for the currency is equal to the supply of the currency.

3. How might the relatively high levels of inflation and interest rates in Thailand affect the bath’s value? (Assume a constant level of U.S. inflation and interest rates.)

Influence of high inflation rate in Thailand

The high level of inflation rate in Thailand would increase the Thai demand for U.S. goods because of the increasing in the Thai demand for dollars. A relative high level of Thai inflation would reduce the U.S. demand for Thai goods, so the demand of Thai baht will decrease while the supply of Thai baht will increase because Thai people will buy more from U.S market which has lower inflation rate

Baht value

S baht

S₋

V1

V2 D baht

D₋₋ Q of Thai baht

We can observe that the Thai Baht value depreciates against U.S Dollar