Model for Currency Exchange Rates and Its Validation

Abstract

A volume-independent model for currency exchange rates in international business gaming simulations is presented that is shown to be stable, simple, and fair. Based on foreign holdings of money, the model pegs exchange rates to allow for currency speculation. The effects of international trade, deposits, loans, and investments are discussed. Proof is given that the model is self-limiting and risk compensating. An empirical study of the model was conducted with 116 undergraduates participating in an international-business gaming simulation. Results show that in the very long term, currency values of the model move in rough correspondence with monetary theory, and in the short term, a high degree of uncertainty with no repeating pattern is evident. Uncertainty rose with the elapse of time between observations at the rate of about 1% per period. The adequate model is sensitive, capable, stable, simple, and fair.