This 5-page paper discusses whether purchasing power parity is a correct tool to use for foreign exchange analysis during Argentine's pegged currency to the U.S. dollar. Bibliography lists 5 sources.
Name of Research Paper File: AS43_MTargepegg.rtf
Unformatted Sample Text from the Research Paper:
Peso follows the flexible exchange rate policy (Argentina Currency, 2008). But for years, until 2002, the currency followed the pegged exchange rate, with its currency pegged to that of the
U.S. dollar (Argentina Currency, 2008). The pegged relationship began in 1991 and ended in 2002 (Argentina Currency, 2008). But then again, there was a time during which the entire world
was on a fixed exchange rate, with the entire collection of currencies linked to the gold standard (Heakal, 2009). In a
pegged currency such as what Argentina had, how appropriate would the use of purchasing power parity as a foreign exchange forecasting tool be? To answer this question, well examine what
a pegged currency is, how Argentinas currency peg to the U.S. dollar worked and finally, if examining parity would have been a logical method for forecasting.
In a very basic sense, an exchange rate is the rate at which one currency is exchanged for another; or the value of one countrys currency
compared to that of anothers (Heakal, 2009). The exchange rate tells someone how much of his/her own currency will be necessary to buy another countrys currency (Heakal, 2009). If the
exchange rate of U.S. to Canadian dollars is 1:1:50, wed know that it will take one U.S. dollar to buy $1.50 Canadian.
There are two ways by which the currency prices are determined against each other. Floating exchange rates, which is what most countries use, are determined by private market, through supply
and demand (Heakal, 2009). If there is a lot of demand for U.S. dollars, for example, the value of the dollar will increase as more and more countries buy it.