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Accounting, Finance, SPSS
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Currency Forecast Accounting, Finance, SPSS Essay

Essay Instructions:

Multinational Financial Management Currency Forecast Part 1 FINC 5510 You will be assigned a currency for this project. 1. 20 points - Obtain some background on your currency. a. What is the currency regime for your currency? (IMF can be of some help on this as well as the Bank of International Settlements – which has links to the central banks (central bank hub) for virtually every country). Things to consider: i. Does the country have an inflation target – if so what is it? ii. What is the current level of unemployment? Document your source and provide a copy since websites do change. iii. Considering the current economic climate for your country (unemployment), what does this suggest about whether the country would benefit from a weak or strong currency? b. Obtain a graph of your currency over the past two to five years. (There are several sources – most of the time you can use their custom features to create your graph – just be sure to give them credit for the chart.) PLEASE NOTE – make sure you know how the currency is quoted. Be aware that higher levels of currency per dollar means the currency has fallen not risen. i. What does this graph suggest about recent trends in the currency and potentially future direction? 2. 50 points - PPP is the most widely accepted of all exchange rate determination theories. Explore the expectations of PPP and its expected impact on the expected future spot rate for your currency. a. (10 points) Go to The Economist (www.economist.com) and using their “Interactive currencycomparison tool” for the Big Mac index (The Big Mac Index is an example of Absolute Purchasing Power Parity or Law of One Price): i. Using the RAW INDEX, obtain the implied PPP exchange rate and the percentage your assigned currency is over/undervalued. 1. Show how this implied exchange rate was calculated using the price of the Big Mac. 2. Show how the percentage over/undervalued was calculated using the actual exchange rate per the interactive tool and the implied rate (or alternatively using the differences in the dollar cost of the Big Mac). ii. Using the ADJUSTED INDEX, obtain the percentage your assigned currency is over/undervalued relative to the dollar. iii. Summarize what the most recent Big Mac Index suggests for your currency. b. (10 points ) What should the spot rate be one year from now based on these rates and Relative Purchasing Power Parity? i. Obtain inflation forecasts for your currency (you will be given the information for the USD). ii. Obtain and document your source for the spot rate for the currency. iii. Make the calculation of the expected spot rate using the PPP formula. c. (10 points) What does the most recent Nominal and Real Effective Exchange Rate suggest about your currency? 1. Go to www.bis.org to locate effective exchange rate indexes. What are the most recent nominal and real effective exchange rate indexes for your currency? 2. Summarize what these indexes suggest about your currency. Here is some help. a. The Nominal effective exchange rate captures the change in the nominal rate since 2010 (their base period). This is simply the percentage change in the currency value relative to a base currency (in this case a basket of currency). It tells you nothing about changes in purchasing power because it does not incorporate changes in the domestic price levels (inflation). Remember, the nominal exchange rate index tells you nothing about whether the currency is overvalued or undervalued. b. As stated in your text, “if purchasing power parity holds – all the real effective exchange rate indices would stay at 100. If the real effective exchange rate index is above 100, the currency would be considered “overvalued” from a competitive perspective (relative to its 2010 level of course). An index value below 100 would suggest an “undervalued” currency.” c. In the long run the real effective exchange rate index should tend to 100 as competitive pressures force the currency back on the equilibrium path, but it can deviate widely in the short-run. d. (20 points) Summarize your findings using the 3 inputs (Absolute PPP, Relative PPP, and Real Effective Exchange rate index) – and draw a conclusion regarding the future direction based on the PPP information you feel is most relevant.

Essay Sample Content Preview:
Indian Rupee as a Market Determined Exchange Rate
[Name of student]
[Name of the institution]
[Name of the Professor]
Finance
The Indian Rupee
* Rupee currency regime
The Indian Rupee is a market determined exchange rate. By being a floating currency, its exchange rate is highly influenced by performance of other currencies pegged to it and the forces of demand and supply. It thus keeps changing on a constant basis in relation as quoted in the financial markets, mostly by banks across the globe. There is however a huge difference between the de facto and de jure exchange rate regime, in particular related to the Rupee. Begging from the early 1990’s going forward, as India rejoined and integrated with the economy of the world, it became more obvious that the Currency will have to be pegged upon the global leading economies. From 1947 to 1946, the Rupee was pegged to the leading currency of the Pound; thereafter it was pegged to the Dollar up until 1975.
According to the reserve bank of India, through the central government, the inflation (CPI) target for the period from August 5, 2016 to March 31, 2021 is 4%, with upper and lower limits of 2% and 6% respectively. As of 2020 February, the inflation level in India is 4.09%.
Fig 1: Unemployment rate in India
Source: Trading economics
The unemployment rate as at January 2020 was 7.2%, a drop from December 2019 of 7.6%. The Current level of 7.2% is one of the lowest relative to average rate the previous one year.
From the unemployment statistics as shown, the country will benefit more from a weaker currency since currency appreciation tends to increase unemployment. However, this is mostly often the case to the formal sector where exporters and large organizations are involved. Exporters will cut jobs to reduce costs and therefore reduce employment. In the more informal sector however, which is the largest sector, a stronger currency will improve employment and improve standard of living
* Chart showing 1 year exchange rate for INR against the USD
Source: Exchange rates UK
Highest: 72.151 INR on 13 Nov 2019.
Average: 71.290 INR over this period.
Lowest: 70.511 INR on 28 Sep 2019.
From the chart above, the Rupee has not showed any serious fluctuation as the difference of the highest and lowest rate for the year is only 1.64. While the X axis of the chart has been indexed in such a way that creates a perception of large fluctuations in the data, it reality the fluctuations are very small over the one year period analyzed. Moreover, the last 6 months show a more stable exchange rate and the least fluctuation time. If the last one year trend is anything to go by, then this trend would be expected to show the same progression for the near future. It’s more likely that this trend will go on the same in projection over a year or two.
Question 2
* The Big Mac index was invented to show whether the correct value of currencies are quoted. This index is therefore able to show whether a currency has been overvalued or undervalued, according to a base currency (which is the US dollar in this case). The Big Mac is the ultimate example of the Purchasing power parity (PPP) index us...
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