A Model for a Fair Exchange Rate

Morgan Aries (), Gianfranco Giromini () and Gunter Meissner ()
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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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2006, vol. 09, issue 01, 51-66

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.

Keywords: Exchange rate; fair value; evaluation model (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219091506000641

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