FINC 5510. Currency Forecast Project Part II. Currency: Indian Rupee

Currency: Indian Rupee

Multinational Financial Management
Currency Forecast Project Part II
FINC 5510
This is a continuous project. You have the same currency and should be expanding on the information you gatheredin Part I. Part I was 70 points and Part II represents 130 points.
4. (30 points) After PPP, supply and demand is the most frequently used theoretical approach. Balance ofPayments is an indication of supply and demand for a currency.
a. Obtain balance of payments data for the last 2 full complete years and the available quarters of 2019 fromwww.imf.org. Click on Data then scroll down and select “Balance of Payment Statistics (BOPS).” Clickon Data Tables and then Select “Balance of Payments Analytic Presentation by Country.” Scroll down tofind your assigned country.
b. Prepare a summary like below for each of these periods for your currency. I would assume you will havepossibly four summaries (2017, 2018, and Q1 2019, Q2 2019 and Q3 2019 but you may have less).As reported on IMF website As adjusted to equal 0
Current account
Capital account
Financial account
 Basic Balance
(subtotal)
Errors and omissions
Change in reserves
Balance of payments 0
c. Obtain the trend of your country’s foreign exchange reserves. I like to see up to 5 years here. A goodsource is tradingeconomics.com. Sometimes a picture of what is going on is easier to see than all thenumbers. Pay attention to the scale of the chart. It may look like a large change but actually in percentageterms turn out to be quite small. Remember that changes in reserves can reflect changes in value but alsopotential purchases or sales of foreign currency reserves in an effort to weaken or support the currency.d. You can also look at graphs of other BOP trends at tradingeconomics.com such as Balance of Trade,Current Account to GDP, Capital Flows and Foreign Direct Investment. Remember that if the country is afloating currency that trends in these accounts can suggest potential pressure on the currency.e. What are the implications for the future value of the currency/pair?
a. If it is a fixed exchange rate currency or not freely floating currency, consider changes in reserves(see c. above)
b. For freely floating currencies, the change in reserves is probably due to changes in the value ofreserve assets or additional IMF reserve requirements so the focus should be more on trends in thecurrent and financial accounts (see d. above)
5. (15 points) According to your text, the asset market approach “argues that exchange rates are determined by thesupply and demand for financial assets of a wide variety.
a. Obtain comparable interest rates for your currency. I will give you the information for the USD. Pleaseprint out and include your source.
b. Use the International Fisher Effect to estimate the expected spot rate be one year from now based on thesenominal rates.
c. Using this interest rate and the inflation rate in Part I 2.b.i. calculate the approximate real rate of return foryour country. I will provide this for the USD. Which currency is offering a higher real rate of return?
6. (20 points) According to your text, the asset market approach “argues that exchange rates are determined by thesupply and demand for financial assets of a wide variety. You need a good understanding of the economicoutlook of the two countries in your currency pair. You have already obtained inflation, interest rates, andunemployment. Make sure you are considering them here too. Now you want to get the big picture. Obtainsome general economic data for your country. I will give you the information for the U.S. Print out and includeyour source (you can often cut and paste into your Word document). I like tradingeconomics.com.a. Obtain current and forecasted GDP growth rates.
b. Obtain industrial production % change from a year ago
c. Obtain the budget balance as a % of GDP
d. Obtain government debt as a % GDP
e. Obtain GDP per capita (a measure of individual wealth) noting what currency this is reported in. Youmay need to translate to the base currency depending on your source.
f. Obtain the trend of each central bank’s balance sheet. I like to see up to 5 years here. This will showwhether the central bank is buying or selling monetary assets. Buying would add money in the handsof investors and tend to stimulate the economy. Selling (reduction of Central Bank Balance sheet)would suggest monetary tightening.
g. What is the overall economic outlook for the two markets based on this information? Which oneappears to potentially be the more attractive one for investors based on this outlook? Discuss theexpected implications on the exchange rates.
7. (20 points) In addition to comparative economic growth and interest rates, investors also may need to considerother factors. Obtain the economic freedom index for your country from www.heritage.org/index/ranking. Iwill give you the information for the US. Discuss the relative attractiveness of the two markets based on theseindexes. Note, you may conclude that there is not much difference that both markets are economically free (thatis, don’t get too excited about small differences in the index).
a. Discuss other factors that may influence the value of the currency in the immediate future –elections, capital controls, Central bank policies, potential for contagion from other countries inthe region, etc. This is BIG!!! Do not ignore this. For example, none of the above might havetold you about Brexit but obviously it is a big factor for both the euro and the pound.8. (15 points) According to your text “Some forecasters believe that …forward exchange rates are unbiasedpredictors of future spot rates.”
a. Obtain spot rates from https://www.investing.com/currencies/ and forward points fromhttps://www.investing.com/rates-bonds/forward-rates for the currency you have been assigned.i. Calculate the outright forward bid, ask, and midrate for the 1 year forward. Provide yourcalculations as below:
Bid Ask Midrate Spread
Spot
Forward points
as a decimal
Outright 1 yr.
forward
ii. Does this suggest a premium or discount? What percentage (use the midrates)?b. PLEASE NOTE – your answer here should be consistent although perhaps not identical to thedifferences in interest rates you collected and your calculation in 1.b.
9. (30 points) Based on your analysis provide a one-page conclusion for upper management that is supported byyour calculations and research. Remember you are not forgetting what you learned about inflation, balance ofpayments, and central bank policies. You must incorporate those in your conclusion. Some suggested formats:a. One paragraph introduction as to the basic approach to forecasting you employed in both Part I and II(i.e., explain what you did and to some degree why). Second paragraph would be the short-run focusand explaining what factors suggest in the short-run. Be sure and look at page 259. Third paragraphwould be the long-run focus and explaining what factors suggest the long-run equilibrium path to be.Final paragraph is the conclusion. It should be supported by your analysis.
b. One paragraph introduction as to the basic approach to forecasting you employed (i.e., explain whatyou did and to some degree why). Second paragraph would be those factors that support currencystrengthening with a discussion of whether each factor is likely to hold in the short-run or long-run. Besure and look at page 259. Third paragraph would be those factors that support currency weakeningwith a discussion of whether each factor is likely to hold in the short-run or long-run. Final paragraphis the conclusion. It should be supported by your analysis.
Grammar, spelling, and organization count. You will be evaluated on your professional writing. Here is a"sample" of a grading rubric I developed.
Written Summary Points Earned Comments
A. Tone, grammar, spelling, and word
choice
5 points
B. Organization and citations 5 points
C. Content 10 points
D. Analysis and conclusions 10 points
Total points possible 30 points