Western Cape Residential Property Review by John Loos Matthew Le Cordeur
The FNB House Price Index for March 2015 rose 5.3% year-on-year. This is slightly slower than the previous month’s revised 5.6%, and continues a slowing year-on-year price inflation trend of recent months.
Western Cape Residential Property Review by John Loos Matthew Le Cordeur
The FNB House Price Index for March 2015 rose 5.3% year-on-year. This is slightly slower than the previous month’s revised 5.6%, and continues a slowing year-on-year price inflation trend of recent months.
Exercise 14–2 Cumulative Inflation Factor for CompChapter Notes.docxgitagrimston
Exercise 14–2: Cumulative Inflation Factor for Comp
Chapter Notes: Inflation means “an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.”1 An inflation factor is used to compute the effect of inflation.
Let’s assume that hospital 1’s General Services expenses for Year 1 were $800,000, versus $900,000 for Year 2. We can assume that these amounts reflect actual dollars expended in each year. But let us also now assume that inflation caused these expenses to rise by 5% in Year 2. If the Chief Financial Officer (CFO) decides to take such inflation into account, a government source will be available to provide the appropriate inflation rate. (The 5% in our example is for illustration only and does not reflect an actual rate.)
The inflation factor for this example is expressed as a factor of 1.05 (1.00 plus 5% [expressed as .05] equals 1.05). The CFO might apply the inflation factor to year 1 in order to give it a spending power basis equivalent to that of year 2. (Applying an inflation factor for a two-year comparison is not usually the case, but let us assume the CFO has a good reason for doing so in this case.) The computation would thus be $800,000 year 1 expense times the 1.05 inflation factor equals an inflation-adjusted year 1 expense figure of $840,000.
However, if the CFO wants to apply an inflation factor to a whole series of years, he or she must account for the cumulative effect over time. An example appears in Table l4–3. We assume a base of $500,000 and an annual inflation rate of 10%. The inflation factor for the first year is 10%, converted to 1.10, just as in the previous example, and $500,000 multiplied by 1.10 equals $550,000 in nominal dollars.
Beyond the first year, however, we must determine the cumulative inflation factor. For this purpose we turn to the Compound Interest Table. It shows “The Future Amount of $1.00,” and appears in Appendix B of the chapter about time value of money. “The Future Amount of $1.00” table has years down the left side (vertical) and percentages across the top (horizontal). We find the 10% column and read down it for years one, two, three, and so on.
*Assignment Exercise 14–2: Cumulative Inflation Factor for Comp
Revise Hospital 2’s projections by applying a cumulative inflation factor of 5% per year.
Review Tables 14–3 and the accompanying text below:
SOURCE OF FACTOR IN COLUMN C ABOVE: From the Compound Interest Look-Up Table “The Future Amount of $1.00” (Appendix 12-B)
Table 14–3 Applying a Cumulative Inflation Factor
Year Factors as shown at 10%
1 1.100
2 1.210
3 1.331
4 1.464
Table 14–3
(A) (B) ...
1 MBA 530 ECONOMICS Unit 11 An Introduction to Mea.docxjeremylockett77
1
MBA 530 ECONOMICS
Unit 11: An Introduction to Measures of Macroeconomic Performance
Part 3: Inflation: Measuring the Cost of Living
** This material is the copyrighted property of Peter W. Schuhmann**
Any form of distribution without written permission from the author is
prohibited
These lecture notes contain links to further reading or data, highlighted in blue.
Topics in this lecture:
1. Purchasing power
2. Inflation
3. Index numbers and the Consumer Price Index (CPI)
4. Problems with the CPI
5. Real and nominal wages and income
6. Real and nominal interest rates
We all have a sense of what “inflation” means… The prices that we pay for goods
and services are rising over time. The goal of this lecture is to carefully define the
concept of inflation and understand how it is measured. Along the way, we’ll
develop the idea of using an “index” that will allow us to distinguish changes in
nominal output and real output. This can be applied to national output (GDP) or to
firm-level output.
Why is an understanding of price changes and the “cost of living” an important
concept?
Understanding how prices have changed over time allows for some insight into
whether or not people are better off or worse off over time. For example, your
grandparents might lament the relatively high prices of certain goods or services
today compared to prices in “the old days”. In 1950, a new house could be
purchased for around $8,000. Most new cars could be purchased for less than
$2,000 and the price of a gallon of gasoline was less than 20 cents. Compared with
prices today, these prices are quite low. Do today’s higher prices mean that we are
worse off? Not necessarily. In 1950 U.S. per capita GDP was around $14,000.
2
Today it is well over $50,000. To decide whether the average person is better off
or worse off than in the past, we need to look at purchasing power.
Purchasing power is the value of currency in terms of its ability to be traded for
goods and services. In terms of the above example comparing the price of goods
and services in 1950 to those same prices today, we’d ask how far the average
income of 1950 went in terms of a consumer’s ability to purchase things compared
to today’s average income.
How do we compare values over time?
In order to help with comparisons of value over time, economists often rely on
index numbers. Index numbers indicate the value of something relative to a
baseline value. The baseline value is usually a number that makes mathematical
comparisons easy, like 100. A price index can be used to calculate the rate of
inflation to help understand changes in the cost of living over time. Other examples
include stock market indices like the Standard & Poor's 500 and the Nasdaq
Composite Index.
For example, the consumer price index (CPI) allows us to make such comparisons
for consumer goods. The CPI is a measure of the average cost of a standard
...
Variations or irregular rise of consumer price index worldwide of which Ghana is no exception has affected many businesses in the country. However, the obvious indicator of an inflationary situation is rising prices of consumer goods. On the basis of the above, the researchers decided to do a trend analysis on consumer price indices obtained from the Ghana Statistical Service to serve as a guide to the business community in Ghana. The main objective of the analysis is to determine the overall pattern in the data and to subsequently fit an appropriate trend for forecasting future values. The main statistical technique used in this work is time series analysis. Based on the trend analysis carried out, the study revealed that, there was general upward trend in the CPIs in Ghana, collaborating an earlier research conducted by Ampofo. However, the shapes of graphs of the CPIs, showed a slight difference. Finally, forecast values or predictions for the CPIs were made for the year 2008.
A Comparative Study between Time Series and Neural Network for Exchange Rate ...iosrjce
IOSR Journal of Computer Engineering (IOSR-JCE) is a double blind peer reviewed International Journal that provides rapid publication (within a month) of articles in all areas of computer engineering and its applications. The journal welcomes publications of high quality papers on theoretical developments and practical applications in computer technology. Original research papers, state-of-the-art reviews, and high quality technical notes are invited for publications.
Exercise 14–2 Cumulative Inflation Factor for CompChapter Notes.docxgitagrimston
Exercise 14–2: Cumulative Inflation Factor for Comp
Chapter Notes: Inflation means “an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.”1 An inflation factor is used to compute the effect of inflation.
Let’s assume that hospital 1’s General Services expenses for Year 1 were $800,000, versus $900,000 for Year 2. We can assume that these amounts reflect actual dollars expended in each year. But let us also now assume that inflation caused these expenses to rise by 5% in Year 2. If the Chief Financial Officer (CFO) decides to take such inflation into account, a government source will be available to provide the appropriate inflation rate. (The 5% in our example is for illustration only and does not reflect an actual rate.)
The inflation factor for this example is expressed as a factor of 1.05 (1.00 plus 5% [expressed as .05] equals 1.05). The CFO might apply the inflation factor to year 1 in order to give it a spending power basis equivalent to that of year 2. (Applying an inflation factor for a two-year comparison is not usually the case, but let us assume the CFO has a good reason for doing so in this case.) The computation would thus be $800,000 year 1 expense times the 1.05 inflation factor equals an inflation-adjusted year 1 expense figure of $840,000.
However, if the CFO wants to apply an inflation factor to a whole series of years, he or she must account for the cumulative effect over time. An example appears in Table l4–3. We assume a base of $500,000 and an annual inflation rate of 10%. The inflation factor for the first year is 10%, converted to 1.10, just as in the previous example, and $500,000 multiplied by 1.10 equals $550,000 in nominal dollars.
Beyond the first year, however, we must determine the cumulative inflation factor. For this purpose we turn to the Compound Interest Table. It shows “The Future Amount of $1.00,” and appears in Appendix B of the chapter about time value of money. “The Future Amount of $1.00” table has years down the left side (vertical) and percentages across the top (horizontal). We find the 10% column and read down it for years one, two, three, and so on.
*Assignment Exercise 14–2: Cumulative Inflation Factor for Comp
Revise Hospital 2’s projections by applying a cumulative inflation factor of 5% per year.
Review Tables 14–3 and the accompanying text below:
SOURCE OF FACTOR IN COLUMN C ABOVE: From the Compound Interest Look-Up Table “The Future Amount of $1.00” (Appendix 12-B)
Table 14–3 Applying a Cumulative Inflation Factor
Year Factors as shown at 10%
1 1.100
2 1.210
3 1.331
4 1.464
Table 14–3
(A) (B) ...
1 MBA 530 ECONOMICS Unit 11 An Introduction to Mea.docxjeremylockett77
1
MBA 530 ECONOMICS
Unit 11: An Introduction to Measures of Macroeconomic Performance
Part 3: Inflation: Measuring the Cost of Living
** This material is the copyrighted property of Peter W. Schuhmann**
Any form of distribution without written permission from the author is
prohibited
These lecture notes contain links to further reading or data, highlighted in blue.
Topics in this lecture:
1. Purchasing power
2. Inflation
3. Index numbers and the Consumer Price Index (CPI)
4. Problems with the CPI
5. Real and nominal wages and income
6. Real and nominal interest rates
We all have a sense of what “inflation” means… The prices that we pay for goods
and services are rising over time. The goal of this lecture is to carefully define the
concept of inflation and understand how it is measured. Along the way, we’ll
develop the idea of using an “index” that will allow us to distinguish changes in
nominal output and real output. This can be applied to national output (GDP) or to
firm-level output.
Why is an understanding of price changes and the “cost of living” an important
concept?
Understanding how prices have changed over time allows for some insight into
whether or not people are better off or worse off over time. For example, your
grandparents might lament the relatively high prices of certain goods or services
today compared to prices in “the old days”. In 1950, a new house could be
purchased for around $8,000. Most new cars could be purchased for less than
$2,000 and the price of a gallon of gasoline was less than 20 cents. Compared with
prices today, these prices are quite low. Do today’s higher prices mean that we are
worse off? Not necessarily. In 1950 U.S. per capita GDP was around $14,000.
2
Today it is well over $50,000. To decide whether the average person is better off
or worse off than in the past, we need to look at purchasing power.
Purchasing power is the value of currency in terms of its ability to be traded for
goods and services. In terms of the above example comparing the price of goods
and services in 1950 to those same prices today, we’d ask how far the average
income of 1950 went in terms of a consumer’s ability to purchase things compared
to today’s average income.
How do we compare values over time?
In order to help with comparisons of value over time, economists often rely on
index numbers. Index numbers indicate the value of something relative to a
baseline value. The baseline value is usually a number that makes mathematical
comparisons easy, like 100. A price index can be used to calculate the rate of
inflation to help understand changes in the cost of living over time. Other examples
include stock market indices like the Standard & Poor's 500 and the Nasdaq
Composite Index.
For example, the consumer price index (CPI) allows us to make such comparisons
for consumer goods. The CPI is a measure of the average cost of a standard
...
Variations or irregular rise of consumer price index worldwide of which Ghana is no exception has affected many businesses in the country. However, the obvious indicator of an inflationary situation is rising prices of consumer goods. On the basis of the above, the researchers decided to do a trend analysis on consumer price indices obtained from the Ghana Statistical Service to serve as a guide to the business community in Ghana. The main objective of the analysis is to determine the overall pattern in the data and to subsequently fit an appropriate trend for forecasting future values. The main statistical technique used in this work is time series analysis. Based on the trend analysis carried out, the study revealed that, there was general upward trend in the CPIs in Ghana, collaborating an earlier research conducted by Ampofo. However, the shapes of graphs of the CPIs, showed a slight difference. Finally, forecast values or predictions for the CPIs were made for the year 2008.
A Comparative Study between Time Series and Neural Network for Exchange Rate ...iosrjce
IOSR Journal of Computer Engineering (IOSR-JCE) is a double blind peer reviewed International Journal that provides rapid publication (within a month) of articles in all areas of computer engineering and its applications. The journal welcomes publications of high quality papers on theoretical developments and practical applications in computer technology. Original research papers, state-of-the-art reviews, and high quality technical notes are invited for publications.
1. ICA GHANA
2015 CPD WORKSHOPS
FINANCIAL MODELLING
BUSINESSVALUATION
ESTIMATION OF FOREIGN EXCHANGE RATES
FACILITATOR: ANTHONY ESSEL-ANDERSON, CA
2. FACILITATOR INFORMTION
ANTHONY ESSEL-ANDERSON
Lecturer in Accounting and Finance, Ashesi University College
Management Consultant, EsselAnderson Consult
E-mail: esselandersonconsult@gmail.com aeanderson@ashesi.edu.gh
Mobile: 024 280 6155 020 836 3329
3 Feb 2015 Prepared byA. Essel-Anderson 2
3. FX Forecasting
Foreign exchange plays important
role in international trade
Importance of FX forecasting
Forecasting based on
technical analysis
Forecasting based on
fundamental analysis
Forecasting based on
international parity
conditions
3 Feb 2015 Prepared byA. Essel-Anderson 3
4. Objectives
3 Feb 2015 Prepared byA. Essel-Anderson 4
• Appreciate the theory that underlies forex rate determination in an uncontrolled
exchange rate regime
• Model the following
• Estimation of FX rate using absolute PPP
• Estimation of FX rate using relative PPP
• Estimation of FX rate using forward parity
• Estimation of FX rate using interest rate parity
5. Technical analysis
• Look for trends in exchange rates and Forex trading volumes that predict future
exchange rate
• Past exchange rate and volume data are used to forecast short-term trends in
currency rates.
• Effective for short-term forecasts.
3 Feb 2015 Prepared byA. Essel-Anderson 5
6. Fundamental analysis
• Look for the link between exchange rate behaviour and economic fundamentals.
• Macro-economic data is used to forecast long-term trends in currency rates.
• Effective for long-term forecasts.
3 Feb 2015 Prepared byA. Essel-Anderson 6
8. The Law of One Price
The Law of
One Price
• Purchasing
Power Parity
3 Feb 2015 Prepared byA. Essel-Anderson 8
In the absence of transaction costs and
official trade barriers, identical goods
will have the same price in different
markets when the prices are expressed
in the same currency.
When the law is true within the bounds
of transaction costs, an identical asset
has the same value regardless of the
currency in which its value is measured.
9. Purchasing Power Parity (PPP)
3 Feb 2015 9Prepared byA. Essel-Anderson
• Meaning
• It is an economic theory that estimates the amount of adjustment needed
on the exchange rate between currencies for the exchange to be
equivalent to each currency's purchasing power.
• Applications
• Used to estimate relative value of different currencies.
• Used to estimate the direction of exchange rate in the long run.
10. Absolute PPP and Relative PPP
3 Feb 2015 10Prepared byA. Essel-Anderson
• Absolute PPP
• In equilibrium, a basket of goods should cost the same in two
different countries once you take the exchange rate into
account.
• Relative PPP
• Predicts a relationship between the inflation rates (i.e. general
price level) of two countries over a specified period and the
movement in the exchange rate between their currencies over
the same period.
11. Absolute PPP Exchange Rate
• Absolute PPP connects FX
rates to price levels.
• FX rates are determined by
price levels.
• The quotient of the prices of identical
commodity in two different currencies
is the PPP spot rate:
• The price of the commodity in one
currency is the product of the price of
the commodity in the other
community and the PPP spot rate:
3 Feb 2015 11Prepared byA. Essel-Anderson
12. Activity 1.1: Absolute
PPP FX Rate
AToshiba Ultrabook is
selling at USD1,100 in the
United States.The price of
the Ultrabook is GHS3,600
in Ghana.
Does Absolute PPP hold
if the current spot rate is
GHS3.2013?
If not, what should be the
spot rate?
3 Feb 2015 Prepared byA. Essel-Anderson 12
13. When Absolute PPP does not hold
3 Feb 2015 Prepared byA. Essel-Anderson 13
• When absolute PPP does not hold, you may pursue a profitable arbitrage by
buying the commodity from one country and selling in the other.
• Consider transaction costs when taking this decision.
14. The RelativeVersion of PPP
3 Feb 2015 Prepared byA. Essel-Anderson 14
• The relative version of PPP
connects change in FX rate to
change in price level (i.e.
inflation).
• Change in FX rate is determined
by inflation.
• PPP refers to relative PPP unless
it is stated otherwise.
• PPP change in FX rate is the inflation
differential between the countries in
question:
• Where
• πA = inflation rate in Country A
• πB = inflation rate in Country B
• T = forecast period in years
∆ FX rate =
1 + πA
1 + πB
T
− 1
15. 3 Feb 2015 Prepared byA. Essel-Anderson 15
Forecasting FX Rate based on Relative PPP
Next
16. Relative PPP FX Forecasts:The underlying Principle
3 Feb 2015 Prepared byA. Essel-Anderson 16
If Relative PPP holds, percentage
change in FX rate equalises percentage
change in price levels (inflation)
On the assumption that PPP holds, FX
rates may be forecasted as under
E St
d/f
= S0
d/f 1 + πd
1 + πf
T
E(St
d/f
)
S0
d/f
=
1 + πd
1 + πf
T
17. Using Relative PPP to Estimate FX Rate
Look for current spot rate for the currency
pair, Sd/f
0
Estimate annual rate of inflation for the
respective countries from CPI data, πd and πf.
Estimate expected change in the FX rate for
various forecast periods using the estimated
inflation rates.
Multiply the expected change in FX rate (i.e.
inflation differential by the current spot to
obtain forecast FX rate).
Think about the
Relative PPP FX
equation
3 Feb 2015 Prepared byA. Essel-Anderson 17
E St
d/f
= S0
d/f 1 + πd
1 + πf
T
18. Activity 1.2: Estimating Inflation Rates
and PPP Change in FX Rate
3 Feb 2015 Prepared byA. Essel-Anderson 18
• Let’s use the historical CPI for
Ghana and the United States to
estimate annual inflation rate
(refer to accompanying Excel
Workbook).
• Let’s estimate the percentage
change in cedi/dollar exchange
rate for various periods on the
assumption that relative PPP
holds.
Step 1: Compute annual CPI for
Ghana and USA
Step 2: Compute annual inflation
rates in Ghana and USA
Step 3: Estimate expected inflation
in Ghana and USA
Step 4: Estimate percentage
change in the USDGHS rate
19. Estimating Expected Inflation
3 Feb 2015 Prepared byA. Essel-Anderson 19
• Ghana CPI historical data may be
obtained from the website of Ghana
Statistical Service or Bank of Ghana
• CPI historical data for Developed
economies, such as US, Japan, EU
area, Canada, Australia, may be
obtained from RateInflation
(http://www.rateinflation.com/consu
mer-price-index/euro-area-historical-
cpi)
• Inflation rate is determined from
CPI data as under:
Inflation rate, π =
CPIt
CPIt−1
− 1
20. Getting CPI Data
from BoG Web
Open Home page >
Statistics > Monetary
Time Series Data
Click on the series you
want in the Available
Series array
Click on the >> button
next to Available Series
array
Select frequency and
start and end years
Finally, click on the
Submit Query button
3 Feb 2015 Prepared byA. Essel-Anderson 20
21. Computing Annual
Inflation Rates
Find annual CPI by
averaging monthly CPI.
Compute annual inflation
using equation below:
3 Feb 2015 Prepared byA. Essel-Anderson 21
22. Estimating Expected Inflation
Break-even Inflation Approach The Fisher Equation Approach
3 Feb 2015 Prepared byA. Essel-Anderson 22
• Look for real yield on an inflation-
linked risk-free security.
• Look for nominal yield on a fixed-rate
risk-free security.
• The break-even inflation is the
nominal yield on Fixed-rate security
minus the real rate on inflation-linked
security.
• The Fisher equation with periodic
compounding:
• 1+ i = (1 + r) x (1 + π)
• Where
• i = nominal interest rate
• r = real interest rate
• π = expected inflation rate
• Expected inflation is estimated as
• π =(1 + i)/(1 + r) - 1
23. Estimating Future Inflation:
A Crude Measure
We may use an arithmetic
average of historical inflation
as a rough measure of future
inflation.
3 Feb 2015 Prepared byA. Essel-Anderson 23
π =
t=1
N
INFLt
N
24. Estimating PPP Change
in FX Rate
Using the expected annual
inflation rates in Ghana and
USA, we estimate the PPP
change in USDGHS rate as
under
3 Feb 2015 Prepared byA. Essel-Anderson 24
∆ FX rate =
1 + πA
1 + πB
T
− 1
25. What-if Analysis on Forecast FX Rate
You may use DataTable to
see the effect of changing
two variables on the forecast
FX rate formula.You may use
1-dimensional or 2-
dimensionalTable
You may use Scenario
Manager to study the effect
of changing many different
variables on the result.
3 Feb 2015 Prepared byA. Essel-Anderson 25
You can get the What-If Analysis tools in the
DataTools group under the Data tab.With
Excel 2007 or later, click on the Data tab and
then select What-If Analysis in the DataTools
group.
26. Using the 1-dimensional Data
Table
We can use the 1-dimensional DataTable to
project USDGHS exchange rate for various
periods.
To create the 1-dimensional DataTable, we
may arrange the various values for period in
either a column or row.
Having arrange the values in a column or
row, we compute the Forecast FX rate
formula result using a base case.
Select the array of cells containing the
various periods and the formula estimate,
and then select DataTable from the What-if
analysis options in the DataTools group
under the Data tab
3 Feb 2015 Prepared byA. Essel-Anderson 26
27. Using the 2-dimensional Data
Table
We can use the 2-dimensional DataTable to
project USDGHS exchange rate for varied
values for inflation in GH and US.
To create the 2-dimensional DataTable, we
may arrange the GH inflation rates in a row
and the US inflation rates in a column.
Having arrange the inflation values, we
compute the Forecast FX rate formula result
using a base case.
Select the array of cells containing the
various periods and the formula estimate,
and then select DataTable from the What-if
analysis options in the DataTools group
under the Data tab
3 Feb 2015 Prepared byA. Essel-Anderson 27
28. Using the Scenario Manager
The Scenario Manager in Excel
uses values in user-defined
scenarios to produce varied results
of a formula.
We may create a Base-case, Best-
case, andWorst-case scenarios,
each with a set of values for GH
inflation, US inflation, and current
spot rate, and save them in Excel.
We then run the Scenario Manager
data tool to produce scenario
reports.
3 Feb 2015 Prepared byA. Essel-Anderson 28
29. Creating the Scenarios
On the Data tab, in the DataTools group, click
What-If Analysis drop-down arrow, and then click
Scenario Manager.
When the Scenario Manager dialog box appears,
click Add to add a new scenario.
In the Scenario name box, type a name for the
scenario, say Best_case.
In the Changing cells box, enter the references for
the cells that you want to specify in your scenario.
In the ScenarioValues dialog box, type the values
that you want to use in the changing cells for this
scenario (i.e. type the values for the Best-case, 12%
for GH_inflation, 3% for US_inflation, and 2.9855
for Spot_ rate.
Click OK to create the scenario
3 Feb 2015 Prepared byA. Essel-Anderson 29
30. Generating the Scenario
Summary Report
See how the changing cells will affect the
USDGHS rate forecast results, we must
command the Scenario Manager to produce a
scenario summary report:
Click Summary … in the Scenario Manager
dialog box.
When the Scenario Summary dialog box
appears, fill in the result cells. Result cells
refers to the cells containing the results of the
formula (in this case, the cell containing the
results of the Forecast USDGHS rate formula).
Click OK, and Excel produces a scenario
summary in a new worksheet.
3 Feb 2015 Prepared byA. Essel-Anderson 30
31. Report of Scenario Analysis of Forecast USDGHS Rate
3 Feb 2015 Prepared byA. Essel-Anderson 31
32. 3 Feb 2015 Prepared byA. Essel-Anderson 32
Forecasting FX Rate based on Forward Parity
Next
33. Forward Parity
3 Feb 2015 33Prepared byA. Essel-Anderson
• Forward exchange rate quoted by FX Dealers may serve as
predictor of expected spot exchange rate
• E[St
d/f] = Ft
d/f
• Where
• St
d/f is spot rate in t periods from now
• Ft
d/f is forward rate for a contract maturing in t periods from now
34. Activity 1.4:
Forecasting Future FX Rate using Forward Parity
3 Feb 2015 Prepared byA. Essel-Anderson 34
• Let’s consider the forward rate
points in the screenshot of
FXStreet.com.
• The current spot rates are
USD1.1356/EUR bid and
USD1.1358/USD ask.
• Let’s compute the forward
exchange rate for the various
periods and use the forward
exchange rates to predict future
spot rates.
35. Computing Forward FX
Rates
Observe the forward points in the
screenshot of FXStreet.com
Forward points a typically
expressed in basis points (1/10,000
of the reference currency).
To determine forward rate, divide
forward points by 10,000 and add
the result to the current spot rate.
On the assumption that dealers’
prediction is right, the future spot
rate is set to the forward rates.
3 Feb 2015 Prepared byA. Essel-Anderson 35
36. 3 Feb 2015 Prepared byA. Essel-Anderson 36
Forecasting FX Rate based on Interest Rate Parity
Next
37. Interest Rate Parity
If interest rate parity holds,
forward premium equalises
interest rate differential
Based on interest rate parity,
future exchange rate is
forecasted as under
3 Feb 2015 37Prepared byA. Essel-Anderson
Ft
d/f
S0
=
1 + id
1 + if
T
E(St
d/f
) = S0
1 + id
1 + if
T
38. Activity 1.5: Forecasting FX Rate using
Interest Rate Parity
3 Feb 2015 Prepared byA. Essel-Anderson 38
• Let’s consider nominal interest
rates on Government of Ghana and
U.S. Federal GovernmentTreasury
bills.
• Let’s use the nominal interest rates
for the same maturity to estimate
interest rate differentials for various
periods.
• Supposing current spot ask rate is
GHS3.2145/USD, let’s forecast the
USDGHS rate for a year from now.
• Nominal rates on GoGTreasury bills
may be obtained from the Bank of
Ghana website (www.bog.gov.gh).
• Nominal rates on U.S. Federal
GovernmentTreasury bills may be
obtained from the U.S. Department
of theTreasury website
(www.treasury.gov)
39. Using Interest Rate Differential to Forecast Future
FX Rate
Step 1:
Compute the GH and US
interest rate differential
for t years from now
Step 2:
Multiply current spot rate
by the interest rate
differential computed in
Step 1.The result is the
Forecast future USDGHS
rate t years from now
3 Feb 2015 Prepared byA. Essel-Anderson 39
40. Forecasting Future FX Rate forVarious Forecast
Period using the DataTable tool
3 Feb 2015 Prepared byA. Essel-Anderson 40
