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Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University : Here we provide direct download links for Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes in pdf format. Download these Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Complete notes in pdf format and read well.

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University : Using two measures of private information and high-frequency transaction data from the leading interdealer electronic broking system Reuters D2000-2, we examine the association between exchange rate return and contemporaneous order flow and the predictability power of lagged order flow on the future exchange rate return. Our empirical analysis demonstrates that at high frequency (5, 10, 15, 20, 25, and 30 min) there exists strong positive association between exchange rate returns and contemporaneous order flow. However, the results indicate weak predictability of order flow on the future exchange rate return.

Download here Unit III Exchange Rate Determination & Forecasting For International Financial System MCOM Sem 4 Delhi University Notes in pdf format 

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University :   Transcript of FOREIGN EXACHANGE RATE DETERMINATION AND FORECASTING . Exchange rate dynamics making sense of market movement OVERSHOOTING . The Determinants of Foreign Exchange Rates . The asset market approach

Economic crisis, 2001
The 1998 recession proved to be unending . three and half years later, Argentina was still in recession. By 2001, crisis conditions had revealed three very important underlying problems with Argentina`s economy:
1. the Argentine peso was overvalued.
2. the currency board regime had eliminated monetary policy alternatives for macroeconomic policy.
3. The Argentine government budget deficit and deficit spending was out control.

Cross-rate Consistency in forecasting
International financial managers must often forecast their home currency Exchange rates for the set of countries in which the firm operates, not only to decide whether to hedge or to make an investment, but also as an integral part of preparing multicountry operating budgets in the home country’s currency.

Foreign Exchange
Rate Determination
and Forecasting

Key Points
Forecasting What to think?
The forecast is variety of theories and practices by which we can assume short or long term, here they make a synthesis of thoughts and experiences.

For decades currency rates are empirical and theoretical studies, which refers to the differentiation of short-term noise of long-term trends.

Balance of payments
Exchange Rate Regime
Int. parity conditions
Asset market approach
The Determinants of Foreign Exchange Rates
Fundamental and technical analysis
JP Morgan case
The Asian currency crisis
The Argentine crisis of 2002
Spot Exchange Rate
Is there a well developed and liquid Money and capital market in that currency?
Is there a sound and secure banking system in place to support currency trading activities?

1. Relative inflation Rates.
2. Relative Interest Rates.
3. Forward exchange Rates.
4. Interest Rate parity.

Parity Conditions

1. Relative real interest rates.
2. Prospects for economic growth.
3. Supply and demand for assets.
4. Outlook for political stability.
5 Speculation and Liquidity.
6 Political risk and controls

Asset Market

1 Current account balances
2 Portfolio investment.
3 Foreign direct investment.
4 Exchange rate regimes.
5 Official monetary reserves.

Balance of Payments
Theory according to key factors on the determination of exchange rates
PPP (Purchasing Parity Power)

Balance of
payments
Monetary
system
Two approaches of analysis to predict the exchange rates
Fundamental analysis technical analysis

Short term “Noise”

A variety of random events, like institutional frictions and technical factors can cause a currency appreciation.
Long-term trends

Happens with some regularity and relative longevity.
The exchange rate itself may deviate in something of a cycle or wave on the way to long term.
Has expectations of stability.
Differentiating short – term Noise
from long term trends

A phenomenon in economics used to explain why exchange rates are more volatile than expected. Some economists have argued that volatility was purely the result of speculators and inefficiencies in the currency market.

sometimes called relative price of bonds or portafolio balance approach, argues that exchange rates are determined by the supply and demand for wide variety of financial assets

shifts in the supply and demand for financial assets alter exchange rates

changes in monetary and fiscal policy alter expected returns and perceived relative risks of financial assents, which in turn alter exchange rates.

The forecasting inadequacies of fundamental theories has led to the growth and popularity of technical analysis. The belief that the study of past price behavior provides insights into future price movements.

The asset market approach assumes that whether foreigners are willing to hold nclaims in monetary form depends on an extensive set of investment considerations or drivers.

Foreign investors are willing to hold securities and undertake foreign direct investment in highly developed countries based primarity on relative real interest rates and the outlook for economic growth and profitability.

The asset market
approach to forecasting

Technical analysis
The asset market approach in highly developed countries

Disequilibrium: Exchange Rates in Emerging Markets
1. The Asian Crisis.
2. The Argentine Crisis.
Illustrative Case: The Asian Crisis
Currency Collapse
Illustrative Case: The Argentine Crisis of 2002
Causal Complexities
Forecasting in Practice

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University : Getting the exchange rate right is a critical objective of all international investors. Unfortunately, getting the exchange rate right on a reasonably consistent basis is far from easy. As anyone involved in the business of currency forecasting can attest, it can be a humbling experience. Currency forecasts can go awry for a variety of reasons. For instance, if one’s expectation of the direction in which fundamental-based forces are heading is flawed, so will be one’s forecast of a currency’s future path. Even if one’s interpretation of the underlying fundamental forces were correct, currency forecasts might still go awry if short-term technical forces carried exchange rates far from their fundamental equilibrium path.

  • Basic approaches
  • Parity conditions
  • Flow (BOP) approach
  • Stock (asset market) approach
  • In addition, need to account for important social & economic events, such as:
  • Infrastructure weaknesses,
  • Speculation,
  • Cross-border FDI,

Foreign political risks

Scores of empirical studies have found that fundamentalbased models tend to perform poorly in terms of explaining exchange-rate trends, particularly over short-term periods. However, fundamental-based models tend to work better over medium and especially longer-run horizons. Unfortunately, most fund managers, whose performances are evaluated over relatively short time spans these days, are often not willing to risk significant sums of capital on the basis of longer-term, fundamental-based projections. That is why many market participants have recently turned their attention away from longer-run fundamental-based forecasting approaches in favor of shorter-term forecasting tools such as technical-based trend-following trading rules. In addition, there has recently been significant interest in flow, sentiment, and positioning indicators to determine the exposure of market participants to the individual currencies. Such indicators are often used as contrarian indicators to determine whether a currency is significantly overbought or oversold, and thus ripe for a correction.

Given the wide variety of forecasting approaches, we thought it would be useful to put together a guidebook that summarized each of those approaches in an easy-toread format. Our intention was to create a user-friendly format where the written text was purposely kept to a minimum and where the charts and tables—about 400 in all—would tell the story. This guidebook recognizes that the tools required for shortterm investors differ significantly from those needed for medium and long-term currency managers. Hence, the guidebook devotes separate chapters to the determination of exchange rates over short, medium, and long-term horizons.

Unit III Exchange Rate Determination And Forecasting For International Financial System MCOM Sem 4 Delhi University Notes

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