The Dollar-Pound Exchange Rate Essay Example | Topics and Well Written Essays - 2500 words

The Dollar-Pound Exchange Rate - Essay Example This coupled with the devaluation of the pound sterling, in a bid to reduce the domestic credit in UK, brought down the exchange rates against pound sterling. But there was always an opinion and not wrongly, that the market was predominantly controlled during those days by speculators which was possibly the single largest reason to work against the interests of pound sterling. Though this was the scene in September 1931, the scene has not undergone drastic changes in terms of operational methods. The number of players in the market, speculators, traders and the countries interacting with one another has all increased. But then the basic working of the market remains more or less similar to the pre-war condition in the case that it is controlled by the speculators of the market to a great degree. The market has been set aside as Futures for the speculators. But then the futures carry a very special impact on the over all exchange rates of the currencies on the bourse. The aim of this research is to study the impact of the futures market on the currency exchange rate across the counter. The objective of the research is to identify a relationship either empirical or otherwise between the futures market and that of the spot business after passage of a specific time. It is quite possible that the current futures price on a specific contract at a specific period could determine the price of the currency, in our case, the pound against the dollar, for that period in time. The projections and the relationships if could be explained and established then it would be easy to predict the future price of the currency at a specified contract period based on the current futures rate as well as on the spot price if relevant. This objective comes out of the hypothesis that there will be a clear impact of the futures rate of the market on the spot price of the currency. The exchange rate would therefore, is expected to vary with the futures price or rate as much as with the spot rate at the given point in time. Research material that is supporting this hypothesis as well as contra to this are studied and these are researched to spot the relationship between them in order to predict the future path that the spot prices might take. Literary Review There have been a number of theories and models that have been set to explain the exchange rate dynamics. Jeffrey Frankel (Sep 1981) writes about the empirical exchange rate model. In a typical exchange rate equation for the empirical nature of the behaviour o the exchange rates, most of the proponents accepts a 'semi-reduced' form of the formula. The equation consisted of the nominal exchange rate on the left hand side of the equation and the right hand side consisted of the variables to the issue, specifically, money supplies, relative Outputs, interest rates and wealth positions normally dictated by the cumulated current account positions. All this would make up the empirical relationships that make up the exchange rate for the currency. Peter Hooper and John Morton (1980) introduced the current account in the equation in the eighties. However, the empirical system of explanation for the exchange rates failed to stand the test of the time. The main purpose to study the changes in the pound-dollar