A Model of Currency Exchange Rates

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 al-low for currency speculation. The effect of inter-national trade, deposits, loans, and investments are discussed. Proof is given that the model is self limiting and risk compensating. Situations for which the model is more or less suitable are discussed. The purpose of the model, not it correspondence with a particular reality, was the driving concern in its development.