International Currency Parity Relationships

International currency parity relationships

Introduction

For there to be exchange between countries, an international monetary system is necessary: the currency market is one that exchanges the different currencies. International finances are a field of knowledge that studies the relations of monetary variables between countries. Within the framework of this disciplinary branch some key contributions arise such as the parity of interest rates, the parity of the purchasing power, Fisher’s international effect, among others. This article has a descriptive methodological approach and quantitative study cases created from secondary information. The results allow to affirm that the parities of international finance may not be fulfilled, especially in the face of interventions in the exchange market and barriers to the free entry and exit of capital. However, by reducing market imperfections and increasing periods of time under study, it is expected that there will be a tendency to convergence.

International currency parity relationships

According to Guillermo (2008) the term parity means balance, in this case balance between the exchange rates of two countries (A and B). The parity establishes the equalization of the price values and interest rates of the two countries in the face of the devaluation rate that relates them.

In order for a financial market to work or there, an international exchange system is necessary: the currency market is the one that works by making changes of coins of one country, for that of another, grouping financial markets by families (Grinblatt & Titman,2005; Titman & Grinblatt, 2016).

Classification of financial markets

The money market is the money market in which titles are changed, mainly short -term and high liquidity. In this market, the central bank of each country usually has a preponderant role since it carries out different monetary policies through the negotiation of titles, the setting of reference interest rates and the bank lace requirements for expansive or contractive purposes tothrough the modification of the monetary base and other aggregates. These policies have the objective of compensating the monetary effects of other external decisions or shocks, in order to preserve balance in the money market. The currency market is the other submarket of the monetary and it is the one where foreign currencies from different countries are negotiated. On the other hand, the financial market contemplates that of capitals. This market mainly develops the sale of titles. These titles can be of variable income (such as shares or yields), fixed income (such as negotiable bonds) and derived through term markets (with futures and options contracts). CEA ~ Center for Administration Studies ~ Page. 48 When a project is evaluated that has flows in different currencies or is carried out in another country several complications appear.

If the balance exists in the markets, the methods will lead to the same result, currently the cases are more complex and do not always reach identical results through both methods. Parity is very important for a country since with this the balance between the exchange rates of two countries is seen this refers to the point at which two currencies have the same value, wanting to say that the exchange rate between two currencies isexactly 1/1.

Parity of interest rates

International finance parities are useful in various situations (Shim & Siegel, 1998; Tirole, 2010): When evaluating changes in international trade between countries, it is estimated how the value of a currency evolves, it is understood that impact causes inflationOn the value of currencies, companies can project future exchange rates, guide international companies.

Equality relations for companies occur when international markets are in balance when there are no arbitration opportunities. The economy of companies operates in terms of products, (services and goods) and capital (monetary resources) are precisely the capital and prices of these products that offer exchange parity. There are three types of exchange parity which are mentioned below:

• Price parity
• PARITY OF PURCHASE
• Interest rates parity
• Price parity (PP, Parity Price)

A price which companies give to a good or service that is related to another price or a price composition of different goods for a specific time. 

If the company 1 pays in currency of the company 1 and the company 2 pays in currency of the company 2 the price must be the same there is parity or equivalence of price since the good of the currency of the company 1 is equivalent to the goodOF THE CURRENCE OF COMPANY 2.

The products tradable by companies identical to other countries must have the same price not important the place where they are in terms of the same currency, which is due to the single price law.

Example: TV at a CDP price 500,000.00 Colombian pesos and the same TV at a price of dollars $ 180.00

PARK OF PURCHASE (PPA)

According to Oliver Blanchard (2008) the parity of the purchasing power (PPA) is the final sum of amounts of goods and services produced in a country, to the monetary value of a country of reference. It is based on an idea developed for the first time by members of the monetarist school of the University of Salamanca in the 16th century, and it was a measurement system began to use by the International Monetary Fund in the early 1990s, although not theUnique: Nominal GDP per capita is the most used measurement to give an approximate idea of the size of an economy.

When comparing the GDP of different countries, it is necessary to make a homogenization of the information since each country measures its product in its local currency, for this you must translate if GDP to a more common currency through the exchange rates. The PPA is one of the most used and appropriate measures to compare the production of goods and services with advantages over the nominal GDP per capita since it takes into account the variations in the price.

With this indicator the monetary illusion linked to the variation of exchange rates is eliminated, so that a depreciation or an appreciation of some currency will not change the parity in the purchasing power of a country, since the inhabitants will be receivingand spending in the same currency of the country. What will affect the GDP PPA will be the amount of goods and services produced in the country because there may be variations in the exchange rate when it comes to exporting or importing.

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