Presentation

on
Foreign Exchange Risk Management &Forecasting Of
Foreign Exchange Rupees and Dollars

Under the guidance of:

Dr. Alok Pandey Presented by:
Dr.Tophan Patra Paras Jindal ( 019117)
Rohan chandna ( 019138)
 INTRODUCTION

Due to globalization of Indian economy the trade

and investments with rest of the world has
increased and firms have come across with
different kinds of risk exposures. Therefore it is
essential for the firms to measure risk exposures
for the purpose of risk management.
 
DEFINATION OF FOREIGN EXCHANGE RISK
Foreign exchange risk is the exposure of business to movements in
foreign exchange rates. Foreign exchange risk arises, where currency
mismatches in an institution’s assets and liabilities and currency cash
flow mismatches. This risk may arise from a variety of sources such as
foreign currency retail cash transactions, retail accounts, investments in
foreign currencies and investments in foreign companies. The amount at
risk involved is a result of the change in the magnitude of potential
exchange rate and the size and duration of the foreign currency exposure.

Financial markets have played very crucial role by introducing hedging

tools such as options, futures, forwards and swaps to manage foreign
exchange risk by the corporate sector.
 Hedging Tools:

•Forwards
•Futures
•Options
•Swaps
 Forecasting of foreign exchange
The foreign exchange rate is the price of one currency in terms of another because
the foreign exchange rate compares the currencies of two countries, the rate depends
on the value of each currency and thus on the economies of both countries.

Ways to Forecast Currency Exchange Rates

 Purchasing Power Parity

 Econometric Models of Forecasting Exchange Rates

 Purchasing Power Parity
The PPP forecasting approach is based on the theoretical law of one price, which states
that identical goods in different countries should have identical prices.
According to purchasing power parity, a pencil in Canada should be the same price as a
pencil in the United States after taking into account the exchange rate and excluding
transaction and shipping costs. In other words, there should be no arbitrage opportunity
for someone to buy inexpensive pencils in one country and sell them in another for a
profit. Example, suppose that the prices of pencils in the U.S. are expected to increase
by 4% over the next year while prices in Canada are expected to rise by only 2%. The
inflation differential between the two countries is:
4%−2%=2%
​
This means that prices of pencils in the U.S. are expected to rise faster relative to prices
in Canada. In this situation, the purchasing power parity approach would forecast that
the U.S. dollar would have to depreciate by approximately 2% to keep pencil prices
between both countries relatively equal. So, if the current exchange rate was 90 cents
U.S. per one Canadian dollar, then the PPP would forecast an exchange rate of:
​ (1+0.02)×(US $0.90 per CA $1)=US $0.92 per CA $1
​
Meaning it would now take 92 cents U.S. to buy one Canadian dollar
 Econometric Models of Forecasting Exchange Rates
The factors used in econometric models are typically based on economic theory, but any
variable can be added if it is believed to significantly influence the exchange rate.

As an example, suppose if a Canadian company has been tasked with forecasting the USD/CAD
exchange rate over the next year. The econometric model here is shown as:
USD/Cad(1 - Year)=z+a(INT)+b(GDP)+c(IGR)

where:
z=Constant baseline exchange rate
a,b and c=Coefficients representing relative weight of each factor
INT=Difference in interest rates between
U.S. and Canada
GDP=Difference in GDP growth rates
IGR=Difference in income growth rates
Forecasting of foreign exchange rupees to
dollars from sep2020 to Dec 2022

Dollar to Indian rupee forecast from Sep

2020 to Dec2022
Source: https://longforecast.com/
Month Open Low-High Close Mo,% Total,%
2020
Sep 1.37 1.33-1.37 1.35 -1.5% -1.1%
Oct 1.35 1.33-1.37 1.35 0.0% -1.1%
Nov 1.35 1.35-1.40 1.38 2.2% 1.1%
Dec 1.38 1.37-1.41 1.39 0.7% 1.8%
2021
Jan 1.39 1.37-1.41 1.39 0.0% 1.8%
Feb 1.39 1.37-1.41 1.39 0.0% 1.8%
Mar 1.39 1.37-1.41 1.39 0.0% 1.8%
Apr 1.39 1.33-1.39 1.35 -2.9% -1.1%
May 1.35 1.32-1.36 1.34 -0.7% -1.8%
Jun 1.34 1.31-1.35 1.33 -0.7% -2.6%
Jul 1.33 1.32-1.36 1.34 0.8% -1.8% Forecasting of foreign exchange
Aug 1.34 1.31-1.35 1.33 -0.7% -2.6%
Sep 1.33 1.30-1.34 1.32 -0.8% -3.3% rupees to dollars from sep2020 to
Oct 1.32 1.32-1.36 1.34 1.5% -1.8% Dec 2022
Nov 1.34 1.28-1.34 1.30 -3.0% -4.8%
Dec 1.30 1.28-1.32 1.30 0.0% -4.8%
2022
Jan 1.30 1.29-1.33 1.31 0.8% -4.0%
Feb 1.31 1.30-1.33 1.31 0.0% -4.0%
Mar 1.31 1.29-1.33 1.31 0.0% -4.0%
Apr 1.31 1.31-1.36 1.34 2.3% -1.8%
May 1.34 1.32-1.36 1.34 0.0% -1.8%
Jun 1.34 1.30-1.34 1.32 -1.5% -3.3%
Jul 1.32 1.32-1.38 1.36 3.0% -0.4%
Aug 1.36 1.31-1.36 1.33 -2.2% -2.6%
Sep 1.33 1.28-1.33 1.30 -2.3% -4.8%
Month Open Low-High Close Mo,% Total,%
2022 Continuation
Oct 1.30 1.24-1.30 1.26 -3.1% -7.7%
Nov 1.26 1.24-1.28 1.26 0.0% -7.7%
Dec 1.26 1.22-1.26 1.24 -1.6% -9.2%
Month Open Low-High Close Mo,% Total,%
2020
Sep 73.25 72.75-74.99 73.88 0.9% 0.9%
Oct 73.88 72.96-75.18 74.07 0.3% 1.1%
Nov 74.07 71.35-74.07 72.44 -2.2% -1.1%
Dec 72.44 70.75-72.91 71.83 -0.8% -1.9%
2021
Jan 71.83 70.68-72.84 71.76 -0.1% -2.0%
Feb 71.76 70.88-73.04 71.96 0.3% -1.8%
Mar 71.96 70.97-73.13 72.05 0.1% -1.6%
Apr 72.05 72.05-75.32 74.21 3.0% 1.3%
May 74.21 73.76-76.00 74.88 0.9% 2.2%
Jun 74.88 73.93-76.19 75.06 0.2% 2.5%
Jul 75.06 73.53-75.77 74.65 -0.5% 1.9%
Dollar to Indian rupee forecast from Sep 2020
Aug 74.65 74.33-76.59 75.46 1.1% 3.0% to Dec2022
Sep 75.46 74.84-77.12 75.98 0.7% 3.7%
Oct 75.98 73.55-75.98 74.67 -1.7% 1.9%
Nov 74.67 74.67-78.06 76.91 3.0% 5.0%
Dec 76.91 75.67-77.97 76.82 -0.1% 4.9%
2022
Jan 76.82 74.98-77.26 76.12 -0.9% 3.9%
Feb 76.12 74.91-77.19 76.05 -0.1% 3.8%
Mar 76.05 75.40-77.70 76.55 0.7% 4.5%
Apr 76.55 73.68-76.55 74.80 -2.3% 2.1%
May 74.80 73.52-75.76 74.64 -0.2% 1.9%
Jun 74.64 74.64-77.12 75.98 1.8% 3.7%
Jul 75.98 72.59-75.98 73.70 -3.0% 0.6%
Aug 73.70 73.70-76.25 75.12 1.9% 2.6%
Sep 75.12 75.12-78.12 76.97 2.5% 5.1%
Month Open Low-High Close Mo,% Total,%
2022 Continuation
Oct 76.97 76.97-80.47 79.28 3.0% 8.2%
Nov 79.28 78.17-80.55 79.36 0.1% 8.3%
Dec 79.36 79.33-81.75 80.54 1.5% 10.0%
 Conclusion

 As the world shrinks, there is an ever-increasing likelihood that we

will be required to address the risks associated with the fact that there
are different currencies used all around the world and that these
currencies will have an immediate impact on our world. We must be
able to evaluate the effects of and actively respond to the changes in
exchange rates with respect to our consumption decisions, investment
portfolios, business plans, government policies, and other life choices.
Thank You