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Finance

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Currency has a lot of academic theories around it. Parity condition is the main theory for economics in the forex. Parity condition explains the exchange price between two currencies that is based on factors like interest rates and inflation. Below are the other economic theories:

Major Theories

Purchasing Power Parity (PPP)

This theory states that after exchange rate adjustments, the price levels should be equal between two countries. The law of one price is the base of this theory where the price of a product should be the same around the world. Opportunity for arbitrage happens when a product has a large difference in cost between two products.

Interest Rate Parity (IRP)

Similar to PPP, it states that to remove arbitrage, similar interest rates should be constant in similar assets from two separate countries, while the risk is similar to each other.

International Fisher Effect (IFE)

This theory is about the appreciation of exchange rates between two countries based on the difference of their nominal interest rates.

Balance of Payment Theory

This theory focuses on accounts dealing with tangible good trades for the exchange rate directions. This measures the current and capital account of a country for the capital, inflow and outflow of a country.

Real Interest Rate Differentiation Model

This theory shows that the currency of a country with high real interest rate will appreciate against a country with low interest rates. This occurs as investors move money to a country with high real rates to gain high returns.

Asset Market Model

This model focuses on the money flow due to foreign investors purchasing assets like bonds or stocks. There will be an increase in currency price of a country if large amounts of foreign investors come in, as they would be required to purchase domestic currency of that country.

Monetary Model

This looks at the monetary policy of a country to determine the exchange rate. The monetary policy of a country handles the supply of money that is determined by the number of printed money by the treasury and the interest rate by the central bank.

Economic Data

Countries are considered as large companies. Information and news about a country can impact its currency just like how current event,financial news and currency news trading can affect the stock price of a company. In forex, it is best to understand economic indicators to see the influences in the market.

Employment Data

These are the data pertaining to the number of people employed within a country or economy, usually released by most countries. A prosperous economy in a country can be seen in their strong employment growth and vice versa, though inflation can also occur with high employment.

Interest Rates

These are the rates dictated by the central bank and are a big focus of those participating in the market as it is used to initiate the monetary policies of a country and adjust monetary supply.

Inflation

This is the measure of the rise and fall of the level of prices over time. Inflation, which is the increase of prices, signifies the depreciation of currency in a country.

Gross Domestic Product

This is the measure of a country’s generated services and finished products over a period of time. GDP is used by foreign investors to measure the economic growth of a country. Investors are enticed with a country’s healthy economy.

Retail Sales

This is the reflection of consumer spending, measuring retail sales over a certain period. Increased spending in a country signifies that the economy is strong.

Durable Goods

These are long term goods that are requested and shipped measured over duration. The spending of individuals here indicates a healthy factory sector.

Trade and Capital Flows

The data from trade flow focuses on the import and export difference of a country, looking at the deficits when there are more imports over export.

The data from capital flows focuses on the inflow of currency by domestic currency sold to foreign investors and flow of investments to the country.

Combining these two give you the balance of payments which is split to three: the current account that monitors the movement of services and goods between countries, the financial account that focuses on the monetary investments between countries and the capital account that focuses on the monetary exchange to purchase capital assets between countries.

In having a better state of finance, proper money management planning is crucial despite it will take some times to comprehend the whole concept of finance and simply improve it. In other words, in mastering on the concept of the finance, it require high amount of commitment and proper understanding on the situation of the finance.

Here are steps in managing your finance:

  1. Create a budget

As the first step in managing your finance is, having proper budgeting on your financial. Creating and sticking to your is not an easy thing to be achieved at first, yet it will help you to analyse the state of your finance with clarity and full of transparency. By that, it could assist you in having better process in managing your money.

Besides, it is the first step for you in paying all of your debts and start your personal savings for your future expenses such as for your retirement, a mortgage and a car. In other words, to achieve a balance financial life and give you a peace of mind, you need to understand your expenses and your income completely in managing your financial state.

 

  1. Understand your income

It would be the most important aspect to understand on the state of income especially when it is related to your expenses. High number of people could know the monthly amount of their income, but do not know the exact amount of their expenses in every month.

In figuring out on your monthly expenses, you could simply subtract the amount of your income per month with your expenses.

 

As you have gain that amount of the result, simply make a proper analysation.

  1. If you end up with negative number: it means that you are spending more than you made.

Action that should be done: Reduce your spending and your expenses

 

  1. If you end up with positive number: it means that you are spending less than you made.

Action that should be done: Increase the payment of your debt or simply increase on your saving.

 

Once you have understand the concept of your expenses and income by knowing the exact details on the cash in and cash out, it would be the suitable time to proceed to the next step in managing your finance.

 

  1. Contingency funding plan

You need always to be prepared for any possibilities in the future. Besides, having proper emergency funds reflect that you are having proper management of finance. You should not simply touch or cash out the fund unless you are experiencing unfortunate or unexpected expense arises that require you to cash out some amount of money to overcome the problem.

 

  1. Planning on personal financial strategy

It is one of the crucial element in maintaining the progress on proper management of finance as you are referring to any of the financial experts. By referring to any experts on your finance, you could simply polish your skills in improving the exact way in managing your financial status.

By mapping out on your personal financial strategy, it could present a specific goal in mind by having proper ability in managing your personal finance better than before.

 

Managing your personal finance might be full of hassle and a complicated process, yet if you can imagine the success of your saving in future, you will believe that it is a worth process throughout your life.

Tips on financial should be nurture to the young adults as they are going to manage on their own finance as they will be having their own commitment in the future. In avoiding them from simply being clueless as they are going to enter the real world, here are the financial tips for the young adult to educate them in managing their own money.

  1. Practice on self-control

The concept in practicing the self-control should be trained by yourself in differentiate between what you want and what you need. Having a credit card, will be easing the process of purchasing as what you need to do is simply swipe the credit card and that stuff is yours. But does having credit card really assist you in having better management on your finance?

Making a habit on everything that you purchase on credit card is not a healthy habit as there is a possibility that you still will be paying on the credit card debt 10 years from now. Having a debt at the very young age reflect on the poor management of your financial.

  1. Manage your own finance

It is really important for you in managing your own finance as there is high possibility that others might wrongly manage your finance if you let them. Managing your own finance will ensure that you know the state and you will know the exact method that could be done to improve your finance in the future.

Besides, instead of simply relying on others advice in terms of financial, take charge on your own financial. What you can do in gaining self-knowledge that related to finance is, buy and read few basic book on finance. Once you have comprehend the knowledge on personal finance, no one could ever trick your management in finance. In other words, by understanding how the money works, it is the first step in making your money work for you.

  1. Initiate the emergency funds

It is vital when it comes in managing your own finance to have your own emergency funds despite you are having students loan or card credit debt or even how low your salary is, it is important for you to have the emergency funds.

Having money to be considered as the emergency funds can help you from experiencing financial trouble. Besides, you are into certain habit in saving money, you will not only be having emergency money and you will also be having retirement money, vacation money or even a proper amount of money for your home down payment.

However, do not simply save you money solely in your savings, you are encourage to save your money with the high-interest on online savings account, or in the money market account so that your money will be having the opportunity in gaining its amount and increase the value of your saving.

Proper methods in managing your finance is important especially for the young adults in having better management of finance for the sake of better future.