George Soros in 1992 he successfully bet $1 billion against the pound sterling,

Question

George Soros in 1992 he successfully bet $1 billion against the pound sterling, in what turned out to be the beginning of a new era in large-scale currency speculation. Under assault by Soros and other speculators, who believed that the pound was overvalued, the British currency crashed, in turn forcing the United Kingdom's dramatic exit from the European Exchange Rate Mechanism (ERM), the precursor to the common European currency, the euro, to which it never returned. Using concepts and tools we have studied in the course, can you suggest a way to judge whether a country’s currency is overvalued or undervalued?

Explanation / Answer

Answer :- The currency of country is infact undervalued as per the concept of Purchasing power parity (PPP) theory. There are two forms of PPP theory : Absolute form and Relative form. Applying the concept of Absolute purchasing power parity (PPP) theory in the above given question, it is suggested that the country's currency is undervalued due to prevailing high inflationary conditions in an economy.

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