Casullo Financial Services

Casullo Financial ServicesCasullo Financial Services

Ya-Ling Chuang (Ambrosia) Ya-Ling Chuang (Ambrosia)

Udayan Shah Udayan Shah

Scott Holtorf Scott Holtorf

Supradipta DattaSupradipta Datta


Exchange Rate Projections Exchange Rate Projections

ForFor

Nike Inc.Nike Inc.


Four Models:Four Models:

1.1. The Purchase Power Parity Model (PPP)The Purchase Power Parity Model (PPP)

2.2. The Monetary (Asset) ApproachThe Monetary (Asset) Approach

3.3. Forward Exchange Rate ModelForward Exchange Rate Model

4.4. Ad-hoc ModelAd-hoc Model


The PPP ModelThe PPP Model

SSFFt+1t+1 = S = SFF

tt * [ 1 + s * [ 1 + sFFt+1t+1]]

MAE 0fMAE 0f εε = S = SFFt+1t+1 – S – St+1t+1

In –sample:In –sample:

ssFFtt= I= Id,td,t – I – Iff,,tt

where Iwhere Id,t+1d,t+1 = CPI = CPId,t+1d,t+1/CPI/CPId,td,t

SSFFtt = S = Stt


The PPP ModelThe PPP Model


tt * [ 1+ s * [ 1+ sFFt+1t+1]]

out-of-sample:out-of-sample:

Regress the equationRegress the equation

IIt+1t+1 = = αα00 + + αα11(I(Itt) + ) + εεtt

ssFFt+1t+1 = I = Id,t+1d,t+1 – I – If,t+1f,t+1

Casullo Financial ServicesCasullo Financial ServicesThe Monetary (Asset) ApproachThe Monetary (Asset) Approach


tt * [ 1+ s * [ 1+ sFFt+1t+1]]

MAE 0fMAE 0f εε = S = SFFt+1t+1 – S – St+1t+1

In –sample:In –sample:

sst,Tt,T = y = yf,Tf,T – y – yd,Td,T +m +mSd,TSd,T – m – mSf,TSf,T

SSFFtt = S = Stt

Casullo Financial ServicesCasullo Financial ServicesThe Monetary (Asset) ApproachThe Monetary (Asset) Approach


tt * [ 1+ s * [ 1+ sFFt+1t+1]]

MAE of MAE of εε = S = SFFt+1t+1 – S – St+1t+1


After Regression AnalysisAfter Regression Analysis

ssFFt+1t+1 = = αα00 + + αα11(y(yf,tf,t – y – yd,td,t) + ) + αα22(m(md,td,t – m – mf,tf,t))


Expectation HypothesisExpectation Hypothesis


tt * [1 + s * [1 + sFFtt]]

MAE of MAE of εε = S = SFFtt – S – Stt

in-sample:in-sample:

ssFFtt = (i = (id,td,t – i – if,tf,t) * T/360) * T/360

SSFFtt = S = Stt


Expectation HypothesisExpectation Hypothesis


tt * [1 + s * [1 + sFFtt]]



ssFFtt = (i = (id,td,t – i – if,tf,t) * T/360) * T/360

Use of random walk in estimating (iUse of random walk in estimating (id,td,t – i – if,tf,t))


Ad-hoc ModelAd-hoc Model


tt * [1 + s * [1 + sFFt+1t+1]]


in-sample:in-sample:

ssFFtt = = αα + ß + ß11(I(Id,td,t – I – If,tf,t) + ß) + ß22 [(i [(id,td,t – i – if,tf,t) * T/360] ) * T/360]

+ ß+ ß3 3 (y(yd,td,t – y – yf,tf,t) + ) + εεtt

SSFFtt = S = Stt

Casullo Financial ServicesCasullo Financial ServicesAd-hoc ModelAd-hoc Model


tt * [1 + s * [1 + sFFt+1t+1]]



Random Walk used in estimating (IRandom Walk used in estimating (Id,td,t – I – If,tf,t), (i), (id,td,t – i – if,tf,t) and ) and (y(yd,td,t – y – yf,tf,t).).


USD/GBPUSD/GBP In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 0.06660.0666 1.64591.6459

MAAMAA 0.09520.0952 0.03480.0348

FWD EXFWD EX 0.06650.0665 0.06660.0666

AD HOCAD HOC 0.06060.0606 0.14260.1426

Random WalkRandom Walk 0.06300.0630 0.02980.0298

RSQRSQ t-statst-stats

0.08510.0851 -0.39, -2.29, -0.79-0.39, -2.29, -0.79

Casullo Financial ServicesCasullo Financial ServicesUS-UK Exchange Rate Forecast Comparison

1

1.2

1.4

1.6

1.8

2

2.2

2.4

1980.0

1984.0

1988.0

1992.0

1996.0

2000.0

Time

US

D/G

BP

PPP (IS)

PPP (OS)

MAA (IS)

MAA (OS)

Ad Hoc (IS)

Ad Hoc (OS)

FWD EX (IS)

FWD EX (OS)

Actual


USD/DEMUSD/DEM In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 0.12950.1295 0.20320.2032

MAAMAA 0.03300.0330 0.02760.0276

FWD EXFWD EX 0.02410.0241 0.11020.1102

AD HOCAD HOC 0.02280.0228 0.11580.1158



0.04640.0464 1.31, -1.57, .0341.31, -1.57, .034

Casullo Financial ServicesCasullo Financial ServicesUS-GRM Exchange Rate Forecast Comparison

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980.0

1984.0

1988.0

1992.0

1996.0

2000.0

Time

US

D/D

EM

PPP (IS)

PPP (OS)

MAA (IS)

MAA (OS)

Ad Hoc (IS)

Ad Hoc (OS)

FWD EX (IS)

FWD EX (OS)

Actual


USD/JPYUSD/JPY In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 0.00190.0019 0.00160.0016

MAAMAA 0.00040.0004 0.00050.0005

FWD EXFWD EX 0.00030.0003 0.00040.0004

AD HOCAD HOC 0.00030.0003 0.00030.0003



0.16450.1645 -.133, -3.28, 1.48-.133, -3.28, 1.48


US-JAP Exchange Rate Forecast Comparison

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0.008

0.009

0.01

0.011

0.012

0.013

0.014

0.015

1980.0

1984.0

1988.0

1992.0

1996.0

2000.0

Time

US

D/J

PY

PPP (IS)

PPP (OS)

MAA (IS)

MAA (OS)

Ad Hoc (IS)

Ad Hoc (OS)

FWD EX (IS)

FWD EX (OS)

Actual


USD/MXPUSD/MXP In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 2.87192.8719 0.04370.0437

MAAMAA 1.33341.3334 0.01140.0114

FWD EXFWD EX 0.40850.4085 0.03800.0380

AD HOCAD HOC 0.34310.3431 0.08160.0816



0.48390.4839 2.97, .97, -.082.97, .97, -.08


US-MEX Exchange Rate Forecast Comparison

0

5

10

15

20

25

30

35

40

45

50

55

1980.0

1981.0

1982.0

1983.0

1984.0

1985.0

1986.0

1987.0

Time

US

D/M

XP

PPP (IS)

MAA (IS)

Ad Hoc (IS)

FWD EX (IS)

Actual


US-MEX Exchange Rate Forecast Comparison

0

0.2

0.4

0.6

0.8

1

1987.0

1991.0

1995.0

1999.0

2003.0

Time

US

D/M

XP

PPP (IS)

PPP (OS)

MAA (IS)

MAA (OS)

Ad Hoc (IS)

Ad Hoc (OS)

FWD EX (IS)

FWD EX (OS)

Actual


USD/KRWUSD/KRW In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 1.69171E-41.69171E-4 2.0495E-42.0495E-4

MAAMAA 1.2164E-41.2164E-4 5.9246E-55.9246E-5

FWD EXFWD EX 7.700E-57.700E-5 1.1752E-41.1752E-4

AD HOCAD HOC 3.786E-53.786E-5 1.1752E-41.1752E-4

Random WalkRandom Walk 3.824E-53.824E-5 2.198E-52.198E-5


0.41870.4187 3.48, 1.80, .843.48, 1.80, .84


US-KOR Exchange Rate Forecast Comparison

0

0.0001

0.0002

0.0003

0.0004

0.0005

0.0006

0.0007

0.0008

0.0009

0.001

0.0011

0.0012

0.0013

0.0014

0.0015

0.0016

0.0017

0.0018

0.0019

0.002

1990.0

1994.0

1998.0

2002.0

Time

US

D/K

RW

PPP (IS)

PPP (OS)

MAA (IS)

MAA (OS)

Ad Hoc (IS)

Ad Hoc (OS)

FWD EX (IS)

FWD EX (OS)

Actual


GBPGBP DEMDEM JPYJPY MXPMXP KRWKRW

11 -0.252-0.252 1.5451.545 -0.138-0.138 0.6230.623 3.2733.273

22 -1.975-1.975 -1.611-1.611 -3.408-3.408 0.2540.254 2.2142.214

33 -0.196-0.196 0.0140.014 0.6740.674 -0.003-0.003 0.0740.074


USD/DEMUSD/DEM In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 0.12950.1295 0.20320.2032

MAAMAA 0.03300.0330 0.02760.0276

FWD EXFWD EX 0.02410.0241 0.11020.1102

AD HOCAD HOC 0.02280.0228 0.11580.1158



0.04640.0464 1.31, -1.57, .0341.31, -1.57, .034


US-GRM Exchange Rate Forecast Comparison

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980.0

1984.0

1988.0

1992.0

1996.0

2000.0

Time

US

D/D

EM MAA (IS)

MAA (OS)

Actual

FORECAST


USD/JPYUSD/JPY In Sample MAEIn Sample MAE Out of Sample Out of Sample MAEMAE

PPPPPP 0.00190.0019 0.00160.0016

MAAMAA 0.00040.0004 0.00050.0005

FWD EXFWD EX 0.00030.0003 0.00040.0004

AD HOCAD HOC 0.00030.0003 0.00030.0003



0.16450.1645 -.133, -3.28, 1.48-.133, -3.28, 1.48


US-JAP Exchange Rate Forecast Comparison

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0.008

0.009

0.01

0.011

0.012

0.013

0.014

0.015

1980.0

1984.0

1988.0

1992.0

1996.0

2000.0

Time

US

D/J

PY Ad Hoc (IS)

Ad Hoc (OS)

Actual

FORECAST

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Casullo Financial Services