...exchange rate determination “Having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area…”[1] - Alan Greenspan Figure 1: Exchange Rate Determination [pic] Source: Exchange Rate Determination I. Short-Run Forecasting Tools Short-term changes in exchange rates are the most difficult to predict and are often determined based on bandwagon effects, overreaction to news, speculation, and technical analysis.[2] Trend-Following Behavior is the tendency for the market to follow a trend. In other words an increase in the exchange rate is more likely to be followed by another increase. Investor Sentiment is based on the consensus of the market. For example if the market is bullish on the dollar, then the dollar is likely to strengthen versus other currencies. The FX market is quite different from the world equity markets in one important aspect: transparency. In equity markets, rules ensure that volume and price data are readily available to all parties… this is NOT the case in FX markets. In fact large FX dealers are able to observe factors such as: shifts in risk appetite, liquidity needs, hedging demands, and institutional rebalancing.[3] Order Flow - there is evidence of a positive correlation between spot exchange rate movements and order flows in the inter-dealer market[4] and with movements in customer order flows.[5] Three explanations for the cause...
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...The Relationship between Interest Rate and Exchange Rate in India Pradyumna Dash[1] Introduction The theoretical as well as empirical relationship between the interest rate and exchange rate has been a debatable issue among the economists. According to Mundell-Fleming model, an increase in interest rate is necessary to stabilize the exchange rate depreciation and to curb the inflationary pressure and thereby helps to avoid many adverse economic consequences. The high interest rate policy is considered important for several reasons. Firstly, it provides the information to the market about the authorities’ resolve not to allow the sharp exchange rate movement that the market expects given the state of the economy and thereby reduce the inflationary expectations and prevent the vicious cycle of inflation and exchange rate depreciation. Secondly, it raises the attractiveness of domestic financial assets as a result of which capital inflow takes place and thereby limiting the exchange rate depreciation. Thirdly, it not only reduces the level of domestic aggregate demand but also improves the balance of payment position by reducing the level of imports. But the East Asian currency crisis and the failure of high interest rates policy to stabilize the exchange rate at its desirable level during 1997-1998 have challenged the credibility of raising interest rates to defend the exchange rate. Critics argue that the high interest rates imperil the ability of the domestic firms...
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...Exchange Rate Determination 1.- Introduction This note discusses (briefly) the theories behind the determination of the exchange rate. By no means this is supposed to be a treaty in the subject. I will leave important contributions aside. Thus, here I mostly analyze what in my opinion are the most important ones. 2.- Theories PPP The purchasing power parity approach to the exchange rate was, and continues to be, a very influential way of thinking about the exchange rate. The PPP derives from the assumption that in the world there exists the "law of one price". This law states that identical goods should be sold at identical prices. This is far from a law (by the way), it is mainly an assumption. For the purpose of the initial discussion let's believe it. The law of one price implies that exchange rates should adjust to compensate for price differentials across countries. In other words, if we are in a banana-world (only bananas exists), and a banana is sold in US at 1 Dollar, and the same banana is sold in Spain at 133 Pesetas, then the exchange rate has to be 133 Pesetas per Dollar. pt = pt* / et This is the absolute PPP approach. Where p represent domestic prices, p* are foreign prices and e is the exchange rate. There is also the relative PPP approach. It is the same model but applied to differences: the change in the exchange rate will compensate inflation differentials. ( ) ˆ 1 + π t = 1 + π t* (1 + et ) ˆ where π t , π t* , and et represent domestic inflation, foreign...
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...On the Relationship between stock return and exchange rate: evidence on China Yaqiong Li a b , Lihong Huang b a b The Business School, Loughborough University ,UK College of Mathematics and Econometrics, Hunan University, Changsha ,Hunan ,China Abstract The purpose of this paper is to investigate the relationship between RMB exchange rate and A-share stock returns in China, in particular in Shanghai stock market. We find that both stock returns and RMB nominal exchange rate are integrated of order 1. The Engle–Granger cointegration test is then performed, suggesting that there is not a long-run equilibrium relationship between stock returns and RMB exchange rates at 5% significance level. However, there is strong evidence suggesting that there is a short-run uni-directional causality relationship from the nominal exchange rate to the stock returns. Keywords: cointegration; Granger causality; RMB exchange rate; stock return; unit root test. 1. Introduction The China’s exchange rate policy has recently emerged as one of major issues in the trade between the PR of China and the United States of America. The controversy is fuelled by China’s pegging of RMB to USD. Since a major devaluation of the RMB in 1994, the Chinese currency’s exchange rate vis-a-vis USD remained more or less unchanged until 21 July 2005, and has fluctuated from RMB 8.22 to 8.11 per dollar since then. The Chinese Authority has recently announced that “RMB will be no longer pegged to the US dollar”...
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...Thursday Monday Time 14:30 – 17:15 14:30 – 17:15 Venue CKB UG04 WMY 406 C. Course Overview Businesses are operating in an increasingly competitive environment. Managing businesses either directly or indirectly exposed to international competition requires an understanding of currency markets, foreign exchange derivatives, exchange risk, exposure and risk management. This course assumes the viewpoint of the financial manager of a multinational corporation (MNC) with investment or financial operations in more than one country. Managers encounter new opportunities as they extend their operations into international markets, as well as new costs and risks. The challenge facing the multinational financial manager is to successfully develop and execute business and financial strategies in more than one national business environment. The aim of this course is to provide you a framework for analyzing financial decisions relating to risk management, financing and investments. These issues cannot be viewed in isolation. For instance, a U.S. corporation may be unwilling to accept a positive-NPV EUR export contract or to borrow JPY unless the exchange risk can be hedged; or a corporate loan can simultaneously serve as a hedge. Hedging is even used to facilitate asset valuation and NPV-analysis. Because the issues are linked, we...
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...A Paper Presentation on EQUILIBRIUM EXCHANGE RATE Theme: International Finance & Trade Institute Name: Symbiosis Institute of International Business (SIIB), Pune Student Name: 1) Swapnil Rathi 2) Kuldeep Joshi Contact No: Swapnil – 9860222020 Kuldeep – 9028029154 Email id: swapnilrathi@siib.ac.in kuldeepjoshi@siib.ac.in 1 ABSTRACT The exchange rate is the rate at which the supply for a currency meets the demand of the same currency. As foreign exchange rates are affected by a number of factors, the equilibrium exchange rate in turn, are also influenced by its supply and demand. Hence equilibrium is achieved when a currency's demand is equal to its supply. Analysing the equilibrium levels of the exchange rates plays a crucial role in the policy making decisions of the policymakers. Exchange rates have a major influence on the prices faced by the consumers and producers throughout the world and the consequences of misalignments can be extremely costly to the nations involved. Therefore economists have developed number of methodologies for calculating the exchange rates. Each methodology involves conceptual explanations and/or imprecise estimates of key parameters and different methodologies which generate different calculated values for equilibrium exchange rates. This makes it difficult to have much confidence in estimates derived from any single methodology on its own. By the same token, it suggests that, ideally, policymakers should inform their judgments through...
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...(1989-1992) and most recently Professor of International Finance at the University of Strathclyde (1992-2004). REPEC (Research Papers in Economics), the body which provides a ranking of all economists in the world, shows that Ronald MacDonald, Adam Smith Professor of Political Economy, is ranked in the top 5% (at number 29) in the world in the field of International Finance. His main areas of research are applied macroeconomics, financial economics and international finance. He has published over 100 refereed journal articles on topics as diverse as the determination of government expenditure and fiscal deficits, the determination of bond yields and stock prices, and the economics of exchange rates. Most of his recent publications have been in the latter area and have involved modeling exchange rate movements in terms of macroeconomic fundamentals, such as money supplies and interest rates, and producing measures of equilibrium exchange rates. He has acted as a consultant to various international organizations, such as the International Monetary Fund and the European Commission, a variety of central banks, including the European Central Bank, the Reserve Bank of New Zealand and the Monetary Authority of Singapore, as well as a number of leading financial institutions. He started his career as...
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...11:00pm PT (Total 50 points) 1. You notice in The Wall Street Journal that the interest rate in the U.S. money markets is 7.5 percent and the interest rate in London is 9 percent. Would you expect the pound to be at premium or discount? Why? (15 points) The pound would be at discount. Because there is difference between US interest rate and UK interest rate. And UK interest rate is higher than US interest rate. This difference will be minimized by the difference between the current spot rate and the forward exchange rate. 2. Why is relative purchasing power parity (PPP) more likely to hold in a hyperinflationary period than in a more “normal” period of price behavior? (15 points) In a hyperinflationary period, money supplies is excess and price rises rapidly. Home currency will depreciate obviously due to rapid changes of price level. In normal period, the price level and exchange rate change slowly. In a hyperinflationary period these two change relatively in coincidence which means PPP more likely to hold of price behavior. 3. In the portfolio balance model, what effect, other things equal, will a foreign government’s budget deficit financed by issuing bonds have on the home country’s currency value and why? (Assume a flexible exchange rate.) (10 points) If a foreign government issues bond, the risk premium will increase. And the rate of return abroad will decrease. The demand of foreign currency will decrease and the demand of home...
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...EXPLANATION OF INDUSTRY RETURNS USING THE VARIABLE BETA MODEL AND LAGGED VARIABLE BETA MODEL Thomas M. Krueger* and Mohammad H. Rahbar* Abstract Beta is found to be a function of several leading economic indicators and government policy variables within the context of the Variable Beta Model which incorporates economic characteristics in the single index model in a multiplicative manner. When contemporaneous macroeconomic descriptors are replaced with reporting-period-lagged macroeconomic descriptors, in the Lagged Variable Beta Model, model explanatory power increases. Findings suggest that the lagged beta model is more likely to satisfy the ordinary least squares assumptions of serially independent error terms. INTRODUCTION Beta as a measure of priced risk is again under attack. Fama and French's [10,11] finding that the single index market model (SIMM) does not describe the last 50 years of average stock returns has been widely reported. Such a finding has widespread implications for corporate finance and investment management. Capital budgeting has frequently been based upon the belief that a higher return was required from projects with more volatile cash flows under the assumption that the volatile cash flows are at least partially dependent upon systematic factors. Firms which have based a portion of their appeal on the basis of their high beta and assumed higher rates of return may see an exodus of shareholders. Utility rate structures designed to give investors a return...
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...affecting the prices of gold in Malaysia. The study used Multiple Linear Regression Model to determined significant relationship between dependent and independent variables, covering data for 10 years period which are from 2003 until 2012. The researcher used three independent variables that affect the prices of gold which are crude oil prices, inflation rates and exchange rates. The empirical results have found there is negatively significant relationship between inflation rates and exchange rates on gold prices, while a crude oil price is positively significant. The results of the study are valuable for both academic and investor. Index Terms—determinant, gold prices, crude oil prices, inflation rates, exchange rates price and sell it at high price later on. Thus, this is why the factors that affect the gold price must be determined so that people may estimate the timing to buy, hold or sell the gold. This study is made to seek the proofs for the possible factors that affect the gold price in Malaysia. From this research, the most important or most influence factor can also be determined. Simply put, the findings for this research will bring benefit to individual, group as well as the government in analyzing the movement of the gold price. To discuss more about this topic, this research paper present the sensitivity of gold prices to the changes in the crude oil prices, inflation rates and exchange rates factor by taking 10 years data from 2003 until 2012. II. DATA AND METHODOLOGY...
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...Dollar Exchange Rates Johan Floyd Omoso Boles 173812 International Christian University International Finance Heather A. Montgomery Abstract: This study finds the purchasing power parity (PPP) model of exchange rates to explain movements in the yen-dollar exchange rate over the long run of twenty two years. The results show that this theory does not necessarily provide a satisfactory explanation of the behavior of exchange rates. However, as the exchange rates became flexible again in recent years, the theory has become more applicable. Does the PPP model exactly indicate that changes in price levels could bring about changes in the yen/dollar exchange rate? 1. Introduction “As for all that bold talk from Tokyo: as FT Alphaville earlier remarked, citing a Wednesday note from Nomura’s rates team, central banks ‘just don’t seem to be getting the same, err, market bang for their buck as they used to’ ” (The Financial Times, August 25, 2010). Apparently, Japan’s effort to push its yen to appreciate a long time ago did not seem to get a huge market response. Nowadays, the situation is not getting any better despite the struggles of the Central Bank of Japan to stabilize the growth of its currency. Acknowledging this scenario, the researcher would like to talk about the influence of the PPP (Purchasing Power Parity) model to argue if changes in price levels could bring about changes in the yen/dollar exchange rate. Below is the yen-dollar exchange rates movements...
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...these investors. This research is basically based on with the help of both primary and secondary data. Literature review: Gay and Robert (2008) investigated the impact of macroeconomic factors on the returns of four emerging markets. The emerging stock markets included were India, Brazil, China and Russia. Their multifactor model comprised of exchange rate and oil prices. By employing ARIMA model on monthly data of March 1999 to July 2006, they concluded that these two macroeconomic variables had no significant relationship with the returns of emerging markets. Hassan and Nasir (2008) also investigated the relationship between equity prices and macroeconomic forces in long run by using monthly data of June 1998 to June 2008.To analyze the causal relationship among macroeconomic forces and stock prices ARDL approach had been used. Results of ARDL concluded the macroeconomic factors that had the main contribution in determining the equity prices in the long run were interest rates, exchange rates and money supply whereas Industrial production, oil prices and inflation had been no significant relationship in the determination of prices of...
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... Mission, Goal Philosophy. Policies of an Organization. 2. Strategy, Strategy as planned action, Its importance, Process and advantages of planning Strategic v/s Operational Planning. 3. Decision making and problem solving. Categories of problems, Problem solving skill, Group decision making. Phases indecision making, 4. Communication Commitment and performance, Role of the leader, Manager v/s Leaders Leadership styles 5. Conventional Strategic Management v[s Unconventional Strategic Management. The Differences, Changed Circumstance. 6. Growth Acce orators: Business Web, Market Power, learning based. 7. Management Control, Elements, Components of Management Information Sysstems 8. Mokena’s 7 8 Models : Strategy, style, structure, systems, staff, skill and Shared values 9. Group Project Reference Text 1. Strategic Management — Thompson & Striekland McGraw Hill 2. Competitive advantage – Michael...
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...available at ScienceDirect Journal of International Financial Markets, Institutions & Money j o ur na l ho me pa ge : w w w . e l s e v i e r . c o m / l o c a t e / i n t f i n Unbiasedness and risk premiums in the Indian currency futures market Satish Kumar a, Stefan Trück b,∗ a b IBS Hyderabad (a Constituent of ICFAI Foundation for Higher Education), India Macquarie University, Sydney, Australia a r t i c l e i n f o a b s t r a c t This paper explores the relationship between currency futures and realised spot rates for the Indian rupee US dollar exchange rate. Using futures contracts with maturities of one, two and three months, we examine the unbiasedness of futures quotes as a predictor of the future spot exchange rate as well as the nature of time-varying risk premiums in this emerging market. Empirical estimates, obtained using monthly data, suggest the biasedness of futures quotes as a predictor of the future spot rate for contracts with maturities of two and three months. We also find significant time-varying risk premiums in the considered futures market, while the premium is of greater magnitude and more significant with increasing maturity of the contracts. We then examine the relationship between realised risk premiums and explanatory variables such as spot currency returns, the futures basis and realised volatility, skewness and kurtosis of spot currency returns. Our results show that spot currency returns and the futures basis can be considered...
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...Presence of Public financial Institutions d) Development of corporate sector. [pic] ❖ Different types of Port-folios for Investment :- Investment — Concept of Port-folio :- Portfolio is the collection of financial or real assets such as equity shares or debentures, bonds, treasury bills & property etc. Steps in selecting a portfolio a) framing of investment policies. b) Valuation of Financial Instruments c) Investment Analysis d) Construction of Portfolio Port-folio management is the investment of funds in different securities in which total risk of the port-folio is minimized while expecting maximum return form it. ❖ Port-folio construction :- i) Determination of Diversification level. ii) Consideration of Investment timings. iii) Selection of Investment assets iv) Allocation of funds to assets v) Evaluation of Port-folio for feedback. Before selecting a port-folio the required norm should be considered regarding Risk & Return aspect. Risk may be caused by the factors :- i) Wrong decision of Investment ii) Kind of Investment...
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