Contact Us
Sign In / Sign Up for FREE
Go to advanced search...

Models for Forecasting Exchange Rates - Essay Example

Comments (0) Cite this document
All the models mentioned above assume that the exchange rate has a value of "1" for a1 - the reason being that there is homogeneity in the money supplies. However, the uniformity ends there. The different assumptions and values assigned are as below:
The assumption that domestic and foreign variables will impact the above equation in differential form is based on a reasoning that there is an equality in the parameters of the domestic and foreign money demand and price adjustment…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91.5% of users find it useful
Models for Forecasting Exchange Rates
Read TextPreview

Extract of sample "Models for Forecasting Exchange Rates"

Download file to see previous pages is a function of sample size = N M = N/log N
Schwartz criterion Consistent estimate of lag length
Akaike lag length Minimum mean square prediction errors
criterion of the dependent variable
Similar to AR Weight (W) is assigned arbitrarily W = 0.95
Random Walk model Current spot rate is a predictor of
the future spot rate;

Basic model Requires no estimation
With a drift parameter Mean monthly (logarithmic)
exchange rate change
These methods minimize criteria based on squared deviations; but it will be ineffective when the fluctuations in foreign exchange rates is unusual - and not as based on reasons established in various studies of fluctuations.
Multivariate Time Series Models - Unconstrained Vector Auto regression (VAR).(1. MEESE, Richard A.; ROGOFF; Kenneth)
Under VAR model, "contemporaneous value of each variable is regressed against lagged values of itself and all the other variables. The exchange rate equation is
st = a i i s - 1 + a l z s t - 2 +"" a i n s f - n + BilXt - 1+ 2 X t - 2 +"" B'iX,- + ui
where X,_j is a vector of the explanatory variables in the earlier equation, lagged jperiods." (1. MEESE, Richard A.; ROGOFF; Kenneth)
VAR yields better forecasts since it does not restrict any variables and is better equipped to tackle the estimation problems that plague the structural models.
Theoretical Models - Purchasing Power Parity Condition (PPP) , Sticky price monetary model of Dornbusch and Frankel , Balassa- Samuelson model based on productivity differentials, uncovered interest rate parity (UIP) (2. Cheung, Yin-Wong ; Chinn, Menzie D. ; Pascaul, Antonio Garcia)
Model Assumption / Determination
Purchasing Power Price indices...
Richard A. MEESE, Kenneth ROGOFF)
These methods minimize criteria based on squared deviations; but it will be ineffective when the fluctuations in foreign exchange rates is unusual - and not as based on reasons established in various studies of fluctuations.
Theoretical Models - Purchasing Power Parity Condition (PPP) , Sticky price monetary model of Dornbusch and Frankel , Balassa- Samuelson model based on productivity differentials, uncovered interest rate parity (UIP) (2. Cheung, Yin-Wong ; Chinn, Menzie D. ; Pascaul, Antonio Garcia)
"Let s be the log exchange rate, m and y be log domestic money stock and output and m* and y* be log foreign money stock and output. Following Mark, the money stock variables are constructed as four quarter moving averages, to eliminate seasonality. The fundamental value of the log exchange rate predicted by the monetary model is: f1 = (m-m*)-(y-y*)"
"This model states that the nominal exchange rate is determined by home-foreign differentials in the monetary fundamentals used above as well as short-term interest rates, expected inflation rates, and cumulated current account balances."
There is no evidence to suggest that exchange rate forecasts obtaine ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 words”, n.d.)
Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 words. Retrieved from
(Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 Words)
Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 Words.
“Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Models for Forecasting Exchange Rates

USD/CNY: Exchange Rates

In other words, Chinese Yuan is not allowed to change its exchange rate according to the forces of demand and supply instead Chinese Government intervenes in the exchange rate market to set the rate it desires. Many experts argue against this policy. They believe that if Chinese government allows the currency market and forces of demand and supply to control the market, the USD/CNY exchange rate will be much higher. Although many economic theorists question the viability of such policy, but it has been proven that the policy has been pretty successful as China is lead the global economy. So much so that even President Obama stated that the Chinese policy of keeping their currency undervalued results in competitive disadvantage fo...
8 Pages(2000 words)Essay

Economics of exchange rates

Operating under such a business scenario is too risky for any business. This is because, regardless of how much sales a business makes, and regardless of how much a business tries to minimize its costs and expenditures, it will always find itself on the receiving end, where its performance is not dependent on its efficiency or effectiveness but rather on the behavior of the foreign exchange markets (Sarno & Taylor, 2005, p. 83). XJP receives virtually all its supplies directly from J&J Ltd, which, in turn, invoices all the costs and expenditures in Euros. On the contrary, XJP makes its sales in Chinese Renminbi. Therefore, it has to convert the income made from the sales from the Chinese currency into the Euros so that it can sub...
4 Pages(1000 words)Essay

The Exchange Rates Mechanisms

...In order to evaluate the reaction of the financial markets to the steps taken by the central bank one has got to review two different types of the exchange rates mechanisms and monetary and fiscal policies that are conducted under different types of exchange rates mechanisms. In Mundell-Fleming model, under floating exchange regime, the central bank does not interfere in the market as the exchange rate is determined by market forces; so fiscal policy that consists of the reducing/ increasing of the taxes and government spending, becomes useless. If the monetary policy is constant and is not modified, higher level of government spending might entail the sharp rise in the demand for money which in turn may lead to higher interest rates...
3 Pages(750 words)Assignment

Interest Rates an Exchange Rate

... in the international market, this increase in demand was anticipated to make the pound stronger against other major currencies, however a speculative attack by investors led to the loss of funds, the government lost and some investors gained huge profits on that day. Overview of the exchange rate interest rate model: This model depict that there is a relationship between the prevailing interest rates and the exchange rate, using historical data a country can use the data to estimate an appropriate model that will help in forecasting future values. The model depicts that a rise in interest rate will lead to a rise in the value of the currency, when interest rates fall then the value of the currency declines, the following diagram shows...
5 Pages(1250 words)Essay

Exchange Rates

...Exchange Rates Task: Exchange Rates There are several differences between flexible and fixed exchange rates. For example, in flexible exchange rate administration, the governments locate their money supplies and allow the exchange rates liberally adjust according to the ensuing ratio of the two money supplies. However, in a fixed rate administration, one of the two nations, with the agreement of the other, situates the exchange rate and allows its money distribution to adjust to suit to the level needed (Barro, 2008). Furthermore, in flexible exchange rate administration, the government upholds direct command of its money supply and loses the control over the exchange rate. However, the opposite happens in fixed rate regime. Furthermore...
1 Pages(250 words)Essay

Foreign Exchange Rates and Exchange Rate Risk

...Introduction International firms which trade globally has to deal in foreign currencies as international trade mostly takes place either in US $ or Euros. International transactions therefore are not incurred in the local currency of the organization and hence firm has to rely on foreign currency. It is however, important to note that the rates at which a foreign currency will be exchanged with local currency is mostly determined by the external forces, organizations therefore may have to incur losses too due to fluctuations in the foreign exchange rates. Foreign exchange rates in international market are determined by the demand and supply of any particular currency against the home currency. The rates therefore are either determined...
4 Pages(1000 words)Essay

Exchange Rates

...Exchange Rate Risk When we are dealing with currency risks, we need to make sure that we take appropriate steps to mitigate our risks or we might end up losing the bulk of our investment (P. COLLIER, 2012). Currency risk can broadly be divided in to three further categories, namely transaction risk (or transaction exposure), translation risk (or translation exposure) and economic risk (or economic exposure) (BJORN DOHRING, 2008). Below we will discuss each of these three types of risks in detail and determine the nature of the risk faced by the importer in question. Transaction risk occurs over a period of time. For instance, let’s say goods are sold by a vendor in United Kingdom to a customer in United States on the first of January...
8 Pages(2000 words)Essay

Fixed vs. Floating exchange rates

...Fixed vs. Floating exchange rates In a nutshell, an exchange rate refers to the price in one nation’s currency of one unit of another nation’s currency. Ever since the collapse of the Bretton Woods regime (soft peg) in the 1970’s, economists have never concluded the debate whether fixed or floating exchange rates are preferable. In my opinion, foreign exchange rates are crucial promoting international transactions while ensuring adjustments to disequilibrium and shocks. In effect, there are 2 systems of exchange rates i.e. fixed exchange rate regime as well as floating exchange rate regime. In fact, a country can only adopt only one of the two foreign exchange rate regimes. What is more, there are two types of fixed exchange rate regimes...
2 Pages(500 words)Essay

Forecasting Exchange Rates

...Finance and Accounting: Assignment al Affiliation QUESTION The Thailand money market has been violated and foreign investors are losing confidence. It should not dampen the hopes of Blade Inc to expand their operations in Thailand. The fact that Entertainment product Inc commits itself to import a limited number of Blade’s inc products is attributed to their unfavorable market condition in Thailand. The import from Thailand will be cheaper but their exports could potentially lose value in Thailand market. Unfavorable economic conditions are caused by high inflation and high interest rates in the economic. Using fundamental forecast will depend on interest rate which could help the company understand the trends of the interest rate...
2 Pages(500 words)Case Study

Exchange Rates

Exchange Rates of the Affiliate Presentation of the two best practices is aimed at leveraging exchange rate information for increasing profits. Ostrow (2011) observes that minimization of transaction costs and maximization of shareholder value are the two best practices. Maximizing shareholder value is an important tool for increasing exchange rate through the provision of the needed amount of resource so as to increase profits. This practice makes specified quantity of current markets and currency options in improving profitability. Satkunas (2007), views that maximizing shareholder value provided long term goals for excellent operation of an organization and, therefore, enhanced profits in the U.S. In addition to that, it enhanc...
1 Pages(250 words)Coursework

Importance and Changes in the Level of Interest Rates to Banking and Insurance Sector in the UK

Indicatively, Ahiakport (2003, 42) noticed that “interest is compensation for the use of capital; not necessarily money”. Moreover, the above researcher mentioned that in general “quantity of money determines the supply of liquid resources, and hence the rate of interest, and in conjunction with other factors (particularly that of confidence) the inducement to invest” (Ahiakport, 2003, 55). In other words, interest rates are related to the capital both directly and indirectly. The direct relation refers to the increase of capital under the influence of specific interest rates, while the indirect relation can be assumed by the ‘attraction’ of foreign funds in a particular country due to high-inte...
14 Pages(3500 words)Term Paper

Currency Exchange as a Key Instrument of International Commerce

The globalization movement created a greater need to determine the equivalent valuation of monetary units also referred to as the exchange rate in order to execute a trade of goods among nations. Currency exchange is the trade value of one unit of currency into another currency which is required to facilitate the trade of goods and services among nations. For example, as of January 9, 2008, the currency exchange market value of one Euro was 1.47 US dollars (Yahoo, 2008). The exchange is a market mechanism that is very instrumental in the monetary policy of the nation. Both the developing nations and a developed nation must instill a sound monetary unit strategy to create a stable currency that is both liquid and valuable in the ma...
10 Pages(2500 words)Term Paper

Different Models of Exchange Rate Determination and Their Empirical Support

Specifically, some of the discussed models of exchange rate determination are the balance of payment approach model, the monetarist or asset approach model, and the martingale-random walk model. Moreover, the paper will also integrate the experiential observations and examples during the paper, in order to understand the practicality of these models.

Under the balance of payment approach, the domestic cost of foreign currency is established like the cost of any other article of trade. In other words, the market demand and supply curvatures are intersected in the exchange market for that particular foreign currency. The modeling of the abovementioned approach related to the demand and supply for foreign exchange is quite...
13 Pages(3250 words)Term Paper

Models of Organizational Change

The work environment and culture in the organizations are also facing tremendous change in keeping pace with the changing society and increasing competition. With the increased necessity of undergoing rapid change, it has been necessary for the organizations to generate newer approaches to manage the change as well as the psychology of the people involved with the change. Several approaches have been made to generate different models for organizational change management. But not much difference was found in them with one or two exceptions. Rather the newer models can be stated as an elaboration of older ones.

It has a boundary separating it from its immediate environment. A number of different perspectives and metaphor...
14 Pages(3500 words)Report

Reduction in Violent Crime Rates in El Salvador

...Reduction in Violent Crime Rates in El Salvador Module Group Module Assignment ID Number Table of Contents 1.0Introduction 3 2.0 Background 3 3.0 Presentation of Methods 4 3.1 Incarceration 4 3.2 Anti-gang Policies 4 4.0 Requirements 6 4.1 Cost 6 4.2 Effectiveness 6 5.0 Comparison of Methods 6 5.1 Cost 6 5.1.1 Incarceration 6 5.1.2 Anti-gang policies 7 5.2 Effectiveness 7 6. Conclusion 8 7. Recommendation 9 1.0 Introduction Violent crime is defined as the offences which involves force or threat of force. According to the Federal Bureau of Investigation’s (FBI), Uniform Crime reports, violent crime includes murder and nonnegligent manslaughter, robbery, aggravated assault and forcible rape. It has been estimated...
7 Pages(1750 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Models for Forecasting Exchange Rates for FREE!

Contact Us