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A Model for a Fair Exchange Rate

Author

Listed:
  • Morgan Aries

    (801 South King Street #3106, Honolulu, HI 96813, USA)

  • Gianfranco Giromini

    (801 South King Street #3106, Honolulu, HI 96813, USA)

  • Gunter Meissner

    (801 South King Street #3106, Honolulu, HI 96813, USA)

Abstract

Financial markets have developed formulas and models to derive fair values for bonds, futures, swaps, options and other securities. This model derives a fair value of an exchange rate, which might be used as a benchmark for a long-term equilibrium level to stabilize currency markets. The model is based on the value-added tax adjusted purchasing power parity exchange rate. This rate is then modified by five components: the macro-economic component, the foreign currency reserve component, the debt component, the interest rate component, and the political stability/leadership component. With respect to the American dollar, the model shows that the Euro and the Japanese Yen are overvalued compared to its current exchange rate, while the Brazilian Real, the Russian Ruble, the Chinese Yuan and the Australian dollar are currently undervalued.

Suggested Citation

  • Morgan Aries & Gianfranco Giromini & Gunter Meissner, 2006. "A Model for a Fair Exchange Rate," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 51-66.
    • Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:01:n:s0219091506000641
    DOI: 10.1142/S0219091506000641
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    Citations

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    Cited by:

    1. Rajesh Mohnot, 2011. "Forecasting Forex Volatility In Turbulent Times," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 5(1), pages 27-38.

    More about this item

    Keywords

    Exchange rate; fair value; evaluation model;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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