ABSTRACT

Exchange rates are determined on the foreign exchange market. The foreign exchange market consists of two segments: the spot exchange market and the forward exchange market. On the spot foreign exchange market transactions are concluded within two working days. The currency of one country is traded against the currency of another country on the foreign exchange market. The spot exchange rate is dependent upon demand and supply on the foreign exchange market. Demand and supply are dependent on a large number of factors. There are two ways of forecasting the exchange rate: fundamental analysis and technical analysis. The main long-term exchange rate indicators are purchasing power parity and a comparison of the growth potential of two countries. The purchasing power parity theory explains the exchange rate on the basis of the price differences between countries.