The reason why currencies of different countries can be compared with each other and form a price relationship is because they all represent a certain amount of value, which is the basis for determining the exchange rate and the reason for the exchange rate. Under the gold standard, gold is the standard currency. The monetary units of two countries that implement the gold standard can determine the exchange rate between them according to their respective gold contents. For example, when the standard of gold coins is adopted in the life of wealth, the weight of 1 pound in Britain is 123.2447 grains, and the fineness is 22 karats, that is, the gold content is 1 13.0438+06 grains of pure gold; The United States stipulates that 1 USD has a weight of 25.8 grains and a purity of 900 thousandths, that is, pure gold with a gold content of 23.22 grains. According to the comparison of the gold content of the two currencies, the exchange rate fluctuates on the basis of 1 =4.8665 USD. Wealth lives under the paper money system. Countries issue paper money as a representative of metal currency, and refer to past practice to stipulate the gold content of paper money by law, which is called gold parity. The comparison of gold parity is the decisive basis of the exchange rate between the two countries. Wealth has life, but paper money cannot be converted into gold. Therefore, the legal gold content of paper money often exists in name only. Therefore, in countries where the official exchange rate is implemented, the exchange rate is set by the national monetary authorities (Ministry of Finance, Central Bank or Administration of Foreign Exchange), and all foreign exchange transactions must be conducted according to this exchange rate. In countries that implement market exchange rate, the exchange rate changes with the change of money supply and demand in the foreign exchange market. 1) purchasing power parity (PPP) purchasing power parity theory stipulates that the exchange rate is determined by the relative prices of the same group of goods. Changes in the inflation rate should be offset by changes in the exchange rate of the same amount but in the opposite direction. Take hamburgers as an example. If a hamburger is worth $2.00 in the United States and $ 1.00 in Britain, then according to the purchasing power parity theory, the exchange rate must be $2 per 1 dollar. If the prevailing market exchange rate is $65,438 +0.7 per pound, then the pound is called an undervalued currency and the dollar is called an overvalued currency. This theory assumes that these two currencies will eventually become 2: 1. The main deficiency of purchasing power parity theory is that it assumes that goods can be traded freely and does not include transaction costs such as tariffs, quotas and taxes. Another disadvantage is that it only applies to goods, but ignores services, which may have a very obvious value gap. Besides the difference between inflation rate and interest rate, there are several other factors that affect the exchange rate, such as the release/reporting of economic figures, asset market and political development. Before 1990s, the theory of purchasing power parity lacked factual basis to prove its effectiveness. After 90' s, this theory seems to be only applicable to the long period (3-5 years). In such a cycle span, the price finally approaches parity. (2) Interest rate parity (IRP) Interest rate parity stipulates that the appreciation (depreciation) of one currency against another currency will be offset by the change of interest rate difference. If the American interest rate is higher than the Japanese interest rate, then the dollar will depreciate against the Japanese yen, and the extent of depreciation depends on preventing risk-free arbitrage. The future exchange rate will be reflected in the forward exchange rate stipulated on that day. In our example, the forward exchange rate of the US dollar is regarded as a discount, because the yen bought at the forward exchange rate is less than the yen bought at the spot exchange rate. The yen is regarded as a premium. After 1990s, there is no evidence that rate parity is still effective. Contrary to this theory, a currency with high interest rate usually does not depreciate, but appreciates because it has suppressed inflation for a long time and is an efficient currency. (3) Balance of payments model This model holds that the foreign exchange rate must be at its equilibrium level-that is, the exchange rate that can generate a stable current account balance. Countries with trade deficits will reduce their foreign exchange reserves and eventually devalue their currencies. Cheap currency makes the country's goods more competitive in the international market, and at the same time makes imported products more expensive. After a period of adjustment, the import volume was forced to decline and the export volume increased, thus stabilizing the trade balance and currency to a balanced state. Like the purchasing power parity theory, the balance of payments model mainly focuses on traded goods and services, ignoring the increasingly important role of global capital flows. In other words, money pursues not only goods and services, but also financial assets such as stocks and bonds in a broader sense. This capital flows into the capital account of the balance of payments, thus balancing the deficit of the current account. The increase of capital flow produces the asset market model. (4) The best asset market model so far. The rapid expansion of financial assets (stocks and bonds) makes analysts and traders look at money from a new perspective. Economic variables such as growth rate, inflation rate and productivity are no longer the only driving forces of currency change. The share of foreign exchange transactions derived from transnational financial assets transactions dwarfs the currency transactions derived from trade in goods and services. The asset market approach regards money as the price of assets traded in an efficient financial market. Therefore, money increasingly shows its close relationship with the asset market, especially the stock market.