Exchange Rates, Foreign Reserves, and Currency Valuation

Summary

The document asks whether a country's cash reserve ratio affects its currency's value. It does not give a direct model or establish a specific relationship. Instead, the answer points readers toward research on foreign-exchange reserves used to defend currencies and on how reserve policies relate to exchange-rate flexibility. It also recommends general exchange-rate models that consider factors operating over short, medium, and long horizons.

For retail traders, it adds a caution to be alert to scams in currency trading. The response is a short collection of references rather than a synthesis: it reports no estimates, tests, or conclusions about how changing a reserve ratio affects valuation. The suggested papers may help frame further research, but the document does not explain how to measure the reserve ratio's effect or distinguish it from other influences on exchange rates.

Key ideas

• Foreign reserves may be used to support or defend a country's currency.
• Exchange-rate models consider influences that can differ across short, medium, and long horizons.
• The response provides references rather than a direct account of how the cash reserve ratio affects currency value.
• Retail currency traders should be alert to scams.

Tags

# How does currency valuation depend on the cash reserve ratio for a country?


# How does currency valuation depend on the cash reserve ratio for a country?












Currency valuation (with respect to other currencies) is an important parameter in finance, but how is it related to the cash reserve ratio?

## Answer by bill_080 (score 1, accepted)

https://quant.stackexchange.com/a/1015

Here's a little bit of everything.

1) Some papers on foreign reserves that are used to defend a country's currency, and the flexibility of their exchange rate:

http://www.imf.org/external/pubs/ft/wp/2001/wp0118.pdf

http://www.eusanz.org/pdf/conf04/choi_baek.pdf

2) Some papers on generic modeling of exchange rates:

http://faculty.darden.virginia.edu/warnockf/GFM/BP-0496%20Exchange%20Rate%20Models.pdf

Figure 1 in the above link is a common view of the short/medium/long-term variables that affect exchange rates.

http://www.federalreserve.gov/Pubs/Ifdp/2003/779/ifdp779.pdf

3) If you're trying to play with exchange rates as a retail investor, you need to be aware of the game/scams:

http://articles.latimes.com/2011/apr/03/business/la-fi-amateur-currency-trading-20110403

http://en.wikipedia.org/wiki/Forex_scam

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.