Introduction: There are various views of how market mechanisms work, but broadly speaking there are those that believe that every piece of available information is priced into the markets and therefore at any given time the interaction of supply and demand gives a value for any security whether it bonds, stocks or currencies. On the other hand, and most traders would agree, that a currency can deviate from fair value if only for an hour and this leads to trading opportunities. My aim is to look into ways of how to value a currency rate and from there how to trade from it.__________________________________________________________________________________ Purchasing Power Parity:Purchasing power parity (PPP) is a measure of a currencies real value when purchasing actual good, for example, once you've taken your Euros and seen the amount you can get in dollars and then compare that to the relative value of two identical goods in various currency zones. The most commonly referred to study on this is the famous "Big Mac Index" produced by The Economist. This is looking at the cost of a McDonalds Big Mac and converting it into US dollars at the Current FX rate. From here you can see wheth…
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