Question

4. Compare and contrast the efficiency, fundamental and technical Views of exchange rate determination. Give numeric examples.

Answer 1

Technical analysis and fundamental analysis are the two main schools of thought when it comes to analyzing the financial markets. As we’ve mentioned, technical analysis looks at the price movement of a security and uses this data to predict future price movement. Fundamental analysis instead looks at economic and financial factors that influence a business. Let’s drive deeper into the details of how these two approaches differ , the criticism against technical analysis and how technical and fundamental analysis can be used together.

Technical analysis typically begin their analysis with charts , while fundamental analysis starts with a company’s financial statement. Fundamental analysis try to determine a company’s value by looking at its income statement, balance sheet and cash flow statement. In financial terms, the analyst tries to measure a company’s intrinsic value by discounting the value of future projected cash flows to a net present value. A stock price that trades below a company’s instinct value is considered a good investment opportunity and vice versa.

Technical analysis believe that there is no reason to analyze a company’s financial statements since the stock price already includes all relevant information. Instead, the analyst focuses on analyzing the stock chat it self for hints into where the price may be headed.

Fundamental analysis takes a long term approach to investing compared to the short term approach taken by technical analysis. While stock chart can be delimited in weeks, days even minutes, fundamental analysis often looks at data over multiple quarters or years. Fundamentally focused investors often wait a long time before a company’s intrinsic value is reflected in the market. For example value investors assume that the market is mispricing a security over the short term, but that the price of the stock will correct itself over the long run. This long run can represent a time frame as long as several years in some cases.

Fundamentally focused investors also rely on financial statements that are filed quarterly as well as changes in earnings for share that don’t emerge on a daily basis like price and volume information. After all a company can not implement sweeping changes over night and it takes time to create new products , marketing campaigns and other strategies to turn around or improve a business. Part of the reason that fundamental analysis use a long term time frame , therefore it because the date they use to analyze a stock is generated much more slowly than the price and volume data used by technical analyst.

The rate of exchange should normally reflect the relation between the internal purchasing power of the different national currency units. It may be illustrated with an example.

Suppose 10 units of commodity X , 12 units of commodity Y,15 units of commodity Z can be brought through spending Rs.1500 and the same quantities of X,Y and Z commodities can be brought in the united states at an outlay of 25 dollars. It signifies that the purchasing power of 25 dollars is equivalent to that of Rs. In their respective countries .That can form the basis for determining the rate of exchange between rupees and dollar.