Casullo Financial Services

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Casullo Financial Services

• Ya-Ling Chuang (Ambrosia)
• Udayan Shah
• Scott Holtorf
• Supradipta Datta

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Casullo Financial Services

• Exchange Rate Projections
• For
• Nike Inc.

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Casullo Financial Services

• Four Models
• The Purchase Power Parity Model (PPP)
• The Monetary (Asset) Approach
• Forward Exchange Rate Model
• Ad-hoc Model

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Casullo Financial Services

• The PPP Model
• SFt1 SFt 1 sFt1
• MAE 0f e SFt1 St1
• In sample
• sFt Id,t If,t
• where Id,t1 CPId,t1/CPId,t
• SFt St

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Casullo Financial Services

• The PPP Model
• SFt1 SFt 1 sFt1
• out-of-sample
• Regress the equation
• It1 a0 a1(It) et
• sFt1 Id,t1 If,t1

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Casullo Financial Services

• The Monetary (Asset) Approach
• SFt1 SFt 1 sFt1
• MAE 0f e SFt1 St1
• In sample
• st,T yf,T yd,T mSd,T mSf,T
• SFt St

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Casullo Financial Services

• The Monetary (Asset) Approach
• SFt1 SFt 1 sFt1
• MAE of e SFt1 St1
• out-of-sample
• After Regression Analysis
• sFt1 a0 a1(yf,t yd,t) a2(md,t mf,t)

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Casullo Financial Services

• Expectation Hypothesis
• SFt1 SFt 1 sFt
• MAE of e SFt St
• in-sample
• sFt (id,t if,t) T/360
• SFt St

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Casullo Financial Services

• Expectation Hypothesis
• SFt1 SFt 1 sFt
• MAE of e SFt St
• out-of-sample
• sFt (id,t if,t) T/360
• Use of random walk in estimating (id,t if,t)

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Casullo Financial Services

• Ad-hoc Model
• SFt1 SFt 1 sFt1
• MAE of e SFt St
• in-sample
• sFt a ß1(Id,t If,t) ß2 (id,t if,t)
  T/360
• ß3 (yd,t yf,t) et
• SFt St

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Casullo Financial Services

• Ad-hoc Model
• SFt1 SFt 1 sFt1
• MAE of e SFt St
• out-of-sample
• Random Walk used in estimating (Id,t If,t),
  (id,t if,t) and (yd,t yf,t).

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Casullo Financial Services
USD/GBP In Sample MAE Out of Sample MAE
PPP 0.0666 1.6459
MAA 0.0952 0.0348
FWD EX 0.0665 0.0666
AD HOC 0.0606 0.1426
Random Walk 0.0630 0.0298
RSQ t-stats
0.0851 -0.39, -2.29, -0.79
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Casullo Financial Services
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Casullo Financial Services
USD/DEM In Sample MAE Out of Sample MAE
PPP 0.1295 0.2032
MAA 0.0330 0.0276
FWD EX 0.0241 0.1102
AD HOC 0.0228 0.1158
Random Walk 0.0234 0.0181
RSQ t-stats
0.0464 1.31, -1.57, .034
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Casullo Financial Services
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Casullo Financial Services
USD/JPY In Sample MAE Out of Sample MAE
PPP 0.0019 0.0016
MAA 0.0004 0.0005
FWD EX 0.0003 0.0004
AD HOC 0.0003 0.0003
Random Walk 0.0003 0.0003
RSQ t-stats
0.1645 -.133, -3.28, 1.48
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Casullo Financial Services
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Casullo Financial Services
USD/MXP In Sample MAE Out of Sample MAE
PPP 2.8719 0.0437
MAA 1.3334 0.0114
FWD EX 0.4085 0.0380
AD HOC 0.3431 0.0816
Random Walk 0.5828 0.0019
RSQ t-stats
0.4839 2.97, .97, -.08
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Casullo Financial Services
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Casullo Financial Services
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Casullo Financial Services
USD/KRW In Sample MAE Out of Sample MAE
PPP 1.69171E-4 2.0495E-4
MAA 1.2164E-4 5.9246E-5
FWD EX 7.700E-5 1.1752E-4
AD HOC 3.786E-5 1.1752E-4
Random Walk 3.824E-5 2.198E-5
RSQ t-stats
0.4187 3.48, 1.80, .84
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Casullo Financial Services
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Casullo Financial Services
GBP DEM JPY MXP KRW
?1 -0.252 1.545 -0.138 0.623 3.273
?2 -1.975 -1.611 -3.408 0.254 2.214
?3 -0.196 0.014 0.674 -0.003 0.074
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Casullo Financial Services
USD/DEM In Sample MAE Out of Sample MAE
PPP 0.1295 0.2032
MAA 0.0330 0.0276
FWD EX 0.0241 0.1102
AD HOC 0.0228 0.1158
Random Walk 0.0234 0.0181
RSQ t-stats
0.0464 1.31, -1.57, .034
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Casullo Financial Services
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Casullo Financial Services
USD/JPY In Sample MAE Out of Sample MAE
PPP 0.0019 0.0016
MAA 0.0004 0.0005
FWD EX 0.0003 0.0004
AD HOC 0.0003 0.0003
Random Walk 0.0003 0.0003
RSQ t-stats
0.1645 -.133, -3.28, 1.48
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Casullo Financial Services