Relationship Between Exchange Rate and Stock Market Essay

Words: 7404
Pages: 30

Pir Mehr Ali Shah

University of Arid Agriculture Rawalpindi

The Relationship between Stock Prices and Exchange Rate,

Evidence from Pakistan

Usman Azhar 08-arid-1606

Abid Hussain 08-arid-1608

Faisal Shahzad 08-arid-1620

Usman Fazal 08-arid-1634

MBA Finance

University Institute of Management Sciences


We would like to dedicate this accomplishment to our beloved and caring parents, and to our teachers with the support of whom we are standing at this step of our life stairs.

All gratitude and thanks to almighty “ALLAH” the Gracious, the most Merciful and Beneficent Who gave us courage to undertake and
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In other words we may say that exchange rate changes have important inference on financial decision-making and on firm’s profitability.

For an exporting firm, depreciation in the local currency makes its goods attractive and leads to an increase in foreign demand and hence revenue for the firm and its value would increase and hence the stock prices will also goes up. On the other hand, a decline in the price of the local currency in terms of foreign currency, decreases profits for an exporting firm because it leads to a decrease in foreign demand of its products. However, for an importing firm, the sensitivity of the exchange rate changes is just the opposite to that of an exporting firm. In addition, fluctuations in exchange rates affect a firm's transaction cost. That is, exchange rate movements also affect the value of a firm’s future payables (or receivables) expressed in foreign currency. Therefore, on a macro basis, the impact of exchange rate fluctuations on stock market seems to depend on both the importance of a country’s international trades in its economy and the degree of the trade imbalance.

Alternatively through ‘portfolio balance approaches’ relationship between exchange rates and stock prices can be explained that stress the role of capital account transaction. Like all commodities, exchange rates are determined by market forces of demand and supply. A boom in stock market would attract capital flows