New Parity concepts to address Globalised economy Essay

New coincidence concepts to address Globalised economy - Essay ExampleFinancial institutions, pension funds and institutional investors are gain out the developing and most prospective markets such(prenominal) as China, India and other Asian markets with lot of investings. In this scenario, there has been a need for proper management of rate fluctuation, risk and supplant rate, which allows the estimation of investment yields and global risk premiums. The important issue is hedging of specific alien risks through currency cover up strategies, derivatives and credit risk management models.In this highly globalised business scenario, issues in international business such as trade disputes, mass meeting rates, inflation and currency crises have necessitated more focus on international financial management. Some new approaches for this are characterized by high analytical rigor, substantial attention to data-based evidence, and integration of functional areas (including finance, economics, strategy, and accounting/taxation). (Reid W. Click, Joshua D. Coval, The Theory and Practice of internationalistic Financial Management, Prentice Hall maiden edition)Global flows of funds have caused a substantial change in the international financial markets and foreign currency markets. ... These issues have potential impact on currency values. Purchasing post Parity (PPP), vex Rate Parity, International pekan Effect, Fisher Effect, and Forwards Rates are some of the major theories on exchange rates.Regarding parity issue, there are analytical problems with the standard comparisons based on market exchange rates existed in developing countries in the global economy. Purchasing Power Parity measures of Global interior(prenominal) Product of countries are popularly used for international comparisons. In PPP measures as standard comparisons of GDPs across countries convert national currency aggregates to a common currency-the US dollar exchange rate. Purchasing Pow er Parity (PPP) is a theory of exchange rate determination and a way to compare the number costs of goods and services amidst countries. PPP has two meter readings, absolute PPP and relative PPP. The absolute version stands for an equal real price for a commodity in all countries. The relative PPP says that exchange rate between two countries will adjust to reflect changes in the price levels of the same countries. (Solnik, International Investments, Adisson Wesley Longman, Inc, New York, 2000)However interest rate parity thesis envisages as a family that holds between spot interest rates of two countries if there are to be no arbitrage opportunity. The relationship depends on the spot and forward exchange rates between the currencies. (http//www.riskglossary.com/link/interest_rate_parity.htm)The generalized version of the Fisher Effect states that real returns are equalized world wide through arbitrage. It says that many factors such as mental barriers, legal constraints, tran saction costs, taxes, political risks and currency risks have a direct bearing on