# Analyze The Determinants Of The Gbp Nominal Exchange Rate And Its Future Prospective

1320 words - 5 pages

Currency, like any other commodities, has a price, and sterling or Great Britain Pound (GBP) is no exception. Obviously, the price of the pound has depreciated against the US dollar during a long term, but it has appreciated against the US dollar over a short period of time. Indeed, according to the World Bank Data (2010), GBP price dropped slightly against that of the USD from 1.65 on September 1st 2009 to 1.55 on August 15th 2010. However, this survey also reveals that the price sterling to dollar has risen steadily between1.45 and 1.55 since last month. So, what causes the fluctuation of the GBP nominal exchange rate has provoked a heated discussion. The purpose of this essay is to explore the determinants of sterling nominal exchange rate and forecast its future trend. Firstly, it will give definition of nominal exchange rate compared to real exchange rate. Secondly, three factors that decided the GBP nominal rate of exchange will be analyzed. Finally, it will predict the future tendency of sterling exchange rate in accordance with the determinants.

It is common to classify the exchange rate into two types, nominal exchange rate and real exchange rate. Nominal rate of exchange defined as the value of the domestic currency in relation to a foreign currency without consideration of the inflation rate (Piana, 2001). Similarly, as Basak and Gallmeyer (1998) maintained that nominal exchange rate is expressed as number of units of home currency that can purchase a unit of another currency. For example, if the nominal exchange rate between the GBP and the USD is 1.55, then one pound will purchase 1.55 dollar. By contrast, real exchange rate takes inflation into consideration, which reveals how much the goods and services in the home nation’s country can be exchanged for the counterpart in foreign country, and it is represented by the following equation: real exchange rate = nominal exchange rate + inflation rate(Chinn, 2006). This concept is clearly illustrated with an example. Imagine U.K. has an inflation rate of 5% while U.S. inflation rate is 2%, then Britain has now a currency whose real value is 5%-2%=3% higher than its nominal one.

In fact, nominal exchange rate is the one which is daily reported by the newspaper, and it is mainly decided by three factors. First of all, interest rate has exerted great influence on sterling nominal rate. As Drab (2005) claimed that “nominal exchange rate react to changes in the relative interests rate between nations.” That is to say, the different interest rates of two countries will lead to the fluctuation of nominal exchange rate, and the capital will flow from the nation whose interest rate is comparatively low to another that with higher rate. For instance, if America and Britain both have interest rates of 5%. Now, the U.S. raises its interest rate to 10%. Of course, investors want to make money as much as possible. Thus, they would like to transfer their British pounds into America dollars and...

## Find Another Essay On Analyze the Determinants of the GBP Nominal Exchange Rate and Its Future Prospective

### The Exchange Rate and International Trade

3379 words - 14 pages international financial system as an attempt to curb fluctuations in currency values. The exchange rates were fixed using the U.S. dollar as the official reserve currency, and a country’s central bank had to buy or sell supplies of its currency using dollars, in the event that the exchange rate strayed from the pre-determined rate. 3 Floating Exchange Rate The Bretton Woods fixed exchange system stayed in effect until the early 1970’s, when it

### Global Financing and Exchange Rate Mechanisms - The Big Mac Index

1265 words - 5 pages predict, "…a country's future inflation rate…we can also predict how the value of its currency relative to other currencies-its exchange rate-is likely to change" (p. 332).ConclusionPurchasing power parity, a method for calculating the correct value of currency is helpful when comparing living standards of global economies as it reveals the exchange rate when expressing incomes and prices. PPP is often different form the market

### Currency and Interest Rate Swap: A Case Study of the Australian Foreign Exchange Market

3038 words - 12 pages preferred because of its effectiveness in the collection of data and generation of the ideologies of the individuals basing on their perception on the fixed-to fixed currency swaps and how they provide another form of arbitrage which can affect the long-term forward exchange pricing.Results and FindingsFrom this study we find that both the currency and interest rate swaps are the determining factors for the success of an organisation in terms of

### A Short History of the Worlds Exchange Rate Systems

2898 words - 12 pages to its gold or silver content. Therefore the exchange rate became the ratio of gold between two currencies. 'Vanilla' Gold Standard: The words 'Gold Standard' are often used in common parlance to describing best practice, but what exactly is a Gold Standard monetary system? Essentially it is a commitment from participating nations, and by proxy their central banks, to buy and sell an unlimited amount of gold at a fixed rate (Bordo, 1981). It

### The Determinants and Consequences of Friendship Composition

595 words - 3 pages The purpose of this study is to examine the friendship composition among high school teenagers and analyze the demographic patterns of the friendship links. Furthermore, the authors estimate if friendship composition have an effect on educational outcomes. The authors intend to close some gaps in the teenage friendship literature by focusing on the effects of the peer composition rather than the cohort quality of the teenager. They use survey

### Determinants of value for prospective Major League Baseball franchises

2550 words - 10 pages Determinants of value for prospective Major League Baseball franchisesDaniel Peterson1. IntroductionThe values of Major League Baseball (MLB) franchises and professional sports franchises in general have garnered a good deal of attention from econometricians during the last decade. The large amount of attention sports receives in the media combined with the staggeringly large values of many franchises have resulted in a significant amount of

### The Internet: its effects and its future

5830 words - 23 pages Internet, its effects in our lives and the future of the Internet:The Internet is, quite literally, a network of networks. It is comprised of ten thousands of interconnected networks spanning the globe. The computers that form the Internet range from huge mainframes in research establishments to modest PCs in people's homes and offices. Despite the recent hype, the Internet is not a new phenomenon. Its roots lie in a collection of computers that

### The Impact of Determinants of Health

1546 words - 6 pages For the purpose of this paper, a 43 year-old female of Aboriginal decent, who is originally from Saskatoon, was interviewed. For confidentiality reasons, the patient will be referred to as A.B. This paper will discuss the admitting diagnosis of A.B., the determinants of health with a focus on income and social status, as well as a reflection on nursing practice. A.B. sought health care after two weeks of experiencing of fever, chills, coughing

### Determinants on the Diffusion of Democracy

2488 words - 10 pages Determinants on the Diffusion of Democracy Throughout contemporary society there exist many different forms of government structures. Some countries range from aristocratic governments, theocratic governments or hierarchies. Governments stand as powerful institutions that instigate political order within a nation. They create and implement different societal rules and help to maintain moral order. With the analysis of the many different

### The Nascent and the Prophylaxis of the Foreclosure Crisis: An Economic Prospective

2143 words - 9 pages liquidity, which pushed the demand curve for financial loan market forward, raising credit prices. It commenced inflation because in order for the government to finance the stimulus package, it needed to print money. The printing of additional legal tender diminishes what gives the currency value, scarcity. It pushes the forward supply curve. With goods and services, it would have been welcome but not with capital because it decreases its worth

### The Exchange of Information

2036 words - 8 pages The Exchange of Information The Internet is a telecommunications superhighway, a collective data of information for corporations, government institutions, private individuals, and universities. This branch of roads leads into nearly every corner of the globe. The superhighway, picks up potential travelers from far away places, exotic destinations, and interesting people. The internet can transport you from one major destination to another

## Similar Essays

### Understanding The Exchange Market Rate Pound To Us Dollar (Gbp/Usd) Exchange Rate

3315 words - 13 pages happen in USD to GBP that have the increase and decrease condition the fluctuation in GBP to USD is faced a difficult time because the fluctuation rate for this section is keep decreasing from the date of 13 march until the end of 18 march. When there were increase its can’t compete with the lost that happen during the decrease of rate for these currency changing. This decreasing in exchange rate bring difficult to many sided because for the

### Australia And Its Exchange Rate Essay

768 words - 3 pages current account would increase in future years.Theoretically, forces of demand and supply will determine the equilibrium exchange rate price. Because movements in the value of Australia's currency can have both positive and negative consequences on the Australian economy and its balance of payments, the RBA and government must also occasionally manage the exchange rate if it views there a need to do so. As a 'hot' currency and from the increasing

### Global Financing And Exchange Rate Mechanisms Paper How It Is Used In Global Financing Operations, And Its Importance In Managing Risks.

791 words - 3 pages foreign exchange reserves. Countertrade is a common solution for these payment problems.CountertradeCountertrade is a term used to cover a wide range of reciprocal trade. Barter is the best-known example and others such as offset, buyback and switch trading have been developed to meet the needs of the world economy. These trade methods involve the exchange of goods or services in order to finance purchases rather than using cash. Reasons for

### The Exchange Rate Essay

1181 words - 5 pages in a non-dollar-denominated currency can be enormous. Fortunately, forwards, swaps, and options can help to mitigate these risks.Forward TransactionsForward transactions provide a way of eliminating exchange rate risk when a firm is to receive or make a foreign currency payment in the future. A forward transaction enables one to buy or sell a currency at a fixed rate at some specified date in the future. By aligning this date to the date of the