Rapidly increasing turnover in the foreign exchange market
leads to great demand for exchange rate forecasts. On the other
hand, most of the fundamental models fail to predict the future
exchange rate. But firstly, before deeper exploring this
problem, the classification of the exchange rate determination
models was reviewed in this paper. Based on the analysis and
synthesis of the literature, the classification of alternative
models was clarified: the models were classified under
fundamental models’ class.
After presenting the main exchange rate determination
models, the conclusion is made that none of the models can
predict the exchange rate appropriately. All of the models have
some drawbacks. On the other hand, microstructure approach
is the most promising at the moment, because it relaxes many
assumptions of other fundamental models. Although, the
model is quite new and the nature of the foreign exchange
market does not allow to fully test the model (to access all the
necessary data) for its abilities to predict the exchange rate.
The advantages and drawbacks for every model were
distinguished. Also the obstacles which affect all of the
exchange rate determination models were determined.