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Global Financing and Exchange Rate Mechanism: PPP
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The purpose of this paper is to analyze the exchange rate mechanisms “Purchasing Power Parity;” to describe how it is used in global financing operations, and its importance in managing risks.
Definition of Purchasing Power Parity
Purchasing Power Parity other wise known as the ‘BigMac Index’ “is a theory of exchange rate determination and a way to compare the average costs of goods and services between countries” (Suranovic, 1999). For example, if a BigMac costs €2.75 in the countries that use Euro and costs $2.65 in US, then the PPP exchange rate would be 2.75/2.65 = 1.0377. “If the actual exchange rate is lower, then the BigMac theory says that you should expect the value of the Euro to go up until it reaches the PPP exchange rate. If
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