Exchange Rate
Theories/International
Parity Conditions
Mint Parity Theory
Mint parity theory explains the determination of
exchange rate between the two countries which are a
gold standard.
In a country which is on gold standard, the currency
is either made of gold or is convertible into gold at a
fixed rate. There are also no restrictions on the
export or import of gold.
Mint Parity Theory
The rate of exchange between the gold standard
countries is determined on a weight to weight basis
of the gold countries of their currencies. In other
words, the exchange rate is determined by the gold
equivalents of the currencies involved.
Mint Parity Theory
The mint par is an expression of the ratio of weights
of gold's used for the coinage of the currencies. For
examples before World War 1 England and
American were on gold standard.
The mint par between these two countries was
pound, one of England +4.866 dollars of America.
One pound worth fine gold= 4.866 dollars
Mint Parity Theory
The ratio of weights of metal 1 pound= $4.866 was
called the mint parity.
The mint par was a fixed rate. It remained so long as
the monetary laws of the country remain unchanged.
The current or the market rate of exchange, however,
fluctuated from time to time due to changes in the
balance of payments of the respective countries.
International Parity Conditions
The forex participants must have to answer some
questions like:-
– What are the determinants of exchange rates?
– Are changes in exchange rates predictable?
The economic theories that link exchange rates,
price levels, and interest rates together are called
international parity conditions.
Parity conditions form the core of the financial
theory that is unique to international finance.
Prices and Exchange Rates
If the identical product or service can be sold in
two different markets, and no restrictions exist
on the sale or transportation costs of moving
the product between markets, the products
price should be the same in both markets.
This is c