When a business deals with foreign currencies, it is important to know the exchange rate and its fluctuations. It is important that businesses can keep pace with the countries with which they have monetary ties. Many do not think about the deterrent effects of exchange rates and what contributes to their rise and fall. It's not something easy to explain. There are three main schools of thought, each with individual drivers that guide each approach. The three main approaches are the purchasing power parity (PPP) approach, the asset market approach and the balance of payments (BOP) approach. These do not compete with each other, but complement each other. Some prefer one over the other or may even use a combination. This document will briefly discuss each approach and their relationships to each other, while hopefully giving you an idea of ​​which one might be best suited for your uses within your business. Approaches Purchasing power is the value of a currency expressed in terms of amount. of goods or services that money can buy. Purchasing power is important because, all things being equal, inflation decreases the amount of goods or services you could buy. In order to measure purchasing power, it would be necessary to compare with the price index. A simple way to understand what purchasing power is is to imagine if you earned the same salary as your grandfather and if you could survive on that salary. Obviously, you could survive on a lot less than you did a few generations ago, due to inflation; you would need a higher salary just to maintain the same quality of life. Many people can survive on a lower salary, but quality of life also plays an important role. Purchasing power parity (PPP) is a theory that...... middle of paper ...... as they may reflect assumptions, insider trading, fraud or poor decisions by central banks and governments, but what is certain is that they create challenges for decision-makers. The exchange rate of the currency of a portfolio that holds the majority of its investments determines the actual return of that portfolio. will be. A deterioration in the exchange rate will diminish the purchasing power of income and capital gains resulting from any returns. Additionally, the exchange rate impacts other income factors, including interest rates, inflation, and even capital gains on domestic securities. Although exchange rates are determined by many complex factors that often puzzle even the most experienced economists, investors still need to understand to some extent how currency values ​​and exchange rates play an important role in the rate. return on their investments..