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Exchange Rate Projections

Exchange Rate Projections. Case I – Casullo Financial Services Prepared by: Tsveta Iankova Julia Petrosyan. February 11, 2010. Objective. Per Nike Inc. request, CFS has been tasked to forecast GBP and JPY exchange rates through 2011 Foreign Currencies to be analyzed: GBP JPY MXN KOW

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Exchange Rate Projections

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  1. Exchange Rate Projections Case I – Casullo Financial Services Prepared by: Tsveta Iankova Julia Petrosyan February 11, 2010

  2. Objective • Per Nike Inc. request, CFS has been tasked to forecast GBP and JPY exchange rates through 2011 • Foreign Currencies to be analyzed: • GBP • JPY • MXN • KOW • Economic Models to be used: • PPP • Forward Exchange Rates • Monetary Approach • Ad-hoc Economic Model - BOP

  3. Method of Forecasts • Completed Regression Analysis for each model for each currency • Using regression equations, forecasted FX rates through 2009 and then compared to Actual 2009 FX rates to come up with the model with lowest MSE • Using Forward Exchange Rates Model (lowest MSE), forecasted GBP and JPY Exchange Rates through 2011

  4. Regression Analysis: PPP and Forward Rates Model for GBP

  5. Regression Analysis: Monetary Approach and Ad Hoc (BOP) for GBP

  6. Regression Analysis: PPP and Forward Rates Model for JPY

  7. Regression Analysis: Monetary Approach and Ad Hoc (BOP) for JPY

  8. Regression Analysis: PPP and Forward Rates Model for MXN

  9. Regression Analysis: Monetary Approach and Ad Hoc (BOP) for MXN

  10. Regression Analysis: PPP and Forward Rates Model for KOW

  11. Regression Analysis: Monetary Approach and Ad Hoc (BOP) for KOW

  12. 2009 Actuals vs 2009 Forecasted FX Rates GBP Calculations JPY Calculations

  13. 2009 Actuals vs 2009 Forecasted FX Rates MXN Calculations KOW Calculations

  14. GBP 2010-2011 Forecast Current Bank of England interest rate: 0.5% Forecast Assumption:Based on Major Central Banks statistics and the UK’s sluggish growth in the final quarter of 2009, our conservative assumption is that interest rates will remain close to what they are for the 2nd and 3rd quarter of 2010, and then gradually grow slightly, by approximately .05 percentage points every 6 months. Conclusion: Over the next eight quarters, i.e. 2010.1 - 2011.4, we forecast the GBP to gradually depreciate against the USD based on Forward Rate Model.

  15. JPY 2010-2011 Forecast Current Bank of Japan interest rate: 0.1% Forecast Assumption: Based on Japan's overall growth strategy and current battle against deflation, coupled with Major Central Banks statistics, our conservative assumption is that interest rates will remain close to what they are through the second quarter of 2010, and then gradually decrease through year 2011. That is, the decrease in interest rates is expected to increase the money supply, thereby causing the inflation rate to rise and helping Japan avoid/minimize deflation. Conclusion: Over the next eight quarters, i.e. 2010.1 - 2011.4, we forecast a very gradual and modest devaluation of the JPY against the USD based on the Forward Rate Model.

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