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FINA 7386 – CASE 1

FINA 7386 – CASE 1. Ntianu Okam Chiedu Osuno Ben Tuan. FORECAST MODELS. PPP FORWARD EXCHANGE RATES MONETARY APPROACH AD-HOC ECONOMIC MODELS. CURRENCIES. USD GBP DEM JPY PESO KOW. MODEL ANALYSIS. PPP PROCESS Based on law of one price Issues Ignores financial transactions

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FINA 7386 – CASE 1

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  1. FINA 7386 – CASE 1 • Ntianu Okam • Chiedu Osuno • Ben Tuan

  2. FORECAST MODELS • PPP • FORWARD EXCHANGE RATES • MONETARY APPROACH • AD-HOC ECONOMIC MODELS

  3. CURRENCIES • USD • GBP • DEM • JPY • PESO • KOW

  4. MODEL ANALYSIS • PPP PROCESS • Based on law of one price • Issues • Ignores financial transactions • Absence of costs • Assumes prices and exchange rates flexible

  5. Relative PPP • Weaker version of Absolute PPP • Takes costs into account • Used to calculate the cost of Currency • Depreciates to PPP = overvalued • Appreciates to PPP = undervalued

  6. Why use PPP • Stable Long Run Predictions • PPP Exchange rates are better predictors of economic fundamentals across countries

  7. FORWARD EXCHANGE RATES Otherwise known as expectation hypothesis. Is not a regression model.

  8. MONETARY APPROACH States that Fx rates are asset prices traded in efficient markets

  9. AD-HOC MODEL • A fundamental approach to forecasting exchange rates. • Based on fundamental economic variables • Further modified through statistical means • It is a mixture of art and science

  10. RESULTS COMPARED - GBP

  11. RESULTS COMPARED - JPY

  12. MODEL OF CHOICE • Based on estimated RSQ, t-stat, and MAE, the Ad-hoc model will be the most effective to use. • Ad-Hoc spot rate forecast for 2005.04: GBP 1.8078 USD/GBP JPY 0.0096 USD/JPY

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