Study of volatility in foreign exchange market

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Study of volatility in foreign exchange market

  1. 1. Study of Volatility in Foreign Exchange Market: A Macro-Economic Perspective Dr Sunita Jindal Dr N.K Sharma
  2. 2. Introduction <ul><li>The foreign exchange volatility has a direct impact on the macroeconomic factors </li></ul><ul><li>Current account deficit, the balance of trade, the Forex reserves created by government, the stock market, the profit margins of different sectors of industries, the interest rates, export import payments and hedging all are affected by the fluctuation in the currency i.e. its volatility. </li></ul>
  3. 3. Objective of the study <ul><li>To establish the relationship and find out the reason and effect of the exchange rate volatility on balance of trade and economy as a whole. </li></ul><ul><li>The measures taken by the RBI to contain the excessive fluctuations. The whole of the study has been made keeping in view the Indian economic conditions. </li></ul><ul><li>INR has been taken as the basic currency in contrary to which the other currencies (USD,JPY,CHF, EUR. GBP) taken to determine the exchange rate and then the correlative study has been made after taking the hypothesis. </li></ul>
  4. 4. Scope of Study <ul><li>This study would reveal the variations in the foreign exchange and thus would help in analyzing the trade. </li></ul><ul><li>The study will provide an understanding of the various factors that create an impact on stock market in the country (India) </li></ul>
  5. 5. Research Methodology  <ul><li>Data is collected from secondary sources like RBI websites, and NSE websites. After collecting this data correlation is used for analysis and interpretation. Correlation is a statistical measurement of the relationship between two variables. Possible correlations range from +1 to –1. </li></ul>
  6. 6. Hypothesis <ul><li>Ho: Exchange rate volatility has no effect on the macro economic factors as stock market and balance of trade. </li></ul><ul><li>H1: Exchange rate volatility has effect on the stock market fluctuations </li></ul><ul><li>H2: Fluctuations in the currency market affect balance of trade </li></ul>
  7. 7. Testing of Hypothesis <ul><li>H1: Exchange rate volatility has effect on the stock market fluctuations </li></ul><ul><li>For testing the hypothesis average value of five currencies USD. JPY, CHF. EUR, GBP is taken. On X axis % change in currencies are taken as X an independent variable and % change in yearly value of Sensex is taken as Y, then correlation is calculated and interpretation is given after the value of correlation. In each case validity of correlation value is interpreted. </li></ul>
  8. 8. The Correlation ( r ) between (USD And INR) And BSE Sensex r= 0.228368 31.834 1.889 2005-06 32.041 12.590 2006-07 110.286 -4.870 2007-08 44.761 -11.729 2008-09 14.844 5.594 2009-10 -14.684 0.455 2010-11 % Δ in value of Sensex % Δ in rate INR/USD(X) Year
  9. 9. Table: 1.2 The Correlation (r) between (INR and JPY) And BSE Sensex r= 0.395969 31.834 1.189 2005-06 32.041 11.646 2006-07 110.286 -19.082 2007-08 44.761 -23.902 2008-09 14.844 .650 2009-10 -14.684 -6.215 2010-11 % Δ in value of Sensex % Δ in rate INR/JPY(X) Year
  10. 10. The Correlation (r) between (INR and CHF) And BSE Sensex r= 0.639217 31.834 1.048 2005-06 32.041 9.639 2006-07 110.286 -16.550 2007-08 44.761 -11.272 2008-09 14.844 -1.862 2009-10 -14.684 -10.266 2010-11 % Δ in value of Sensex % Δ in rate INR/USD(X) Year
  11. 11. The Correlation (r) between (INR and EUR) And BSE Sensex r= 0.657038 31.834 5.460 2005-06 32.041 1.695 2006-07 110.286 12.739 2007-08 44.761 -5.902 2008-09 14.844 10.152 2009-10 -14.684 -2.484 2010-11 % Δ in value of Sensex % Δ in rate INR/USD(X) Year
  12. 12. The Correlation (r) between (INR and GBP) And BSE Sensex r= 0.030735 31.834 1.889 2005-06 32.041 12.590 2006-07 110.286 -4.870 2007-08 44.761 -11.729 2008-09 14.844 5.594 2009-10 -14.684 0.455 2010-11 % Δ in value of Sensex % Δ in rate INR/USD(X) Year
  13. 13. Data Interpretation <ul><li>correlation between (INR and USD) and BoT is r =0.666274 </li></ul><ul><li>correlation between (INR and JPY) and BoT is r = 0.525871 </li></ul><ul><li>correlation between (INR and CHF) and BoT is r = .275787 </li></ul><ul><li>correlation between (INR and EUR) and BoT is r =0.114812 </li></ul><ul><li>correlation between (INR and GBP) and BoT is r = -0.22013 </li></ul>
  14. 14. Hypothesis Testing -2 <ul><li>H2: Volatility in the foreign currency market affects the balance of trade </li></ul><ul><li>For testing this hypothesis, volatility in Forex market is taken as independent variable and balance of trade is dependent variable. In following tables correlation is calculated for the % change in five currencies and % change in the value of balance of trade (BoT) </li></ul>
  15. 15. Findings <ul><li>Ho to be true as” The volatility in the exchange market does not affect volatility in the Stock Market” in case of USD,JPY and GBP. </li></ul><ul><li>null hypothesis Ho to be rejected since the coefficient of correlation is more tending to one. The hypothesis “H1: Exchange rate volatility (CHF) has effect on the stock market fluctuations is correct”. </li></ul><ul><li>Ho to be wrong since the coefficient of correlation is more tending to one. The hypothesis “H1: Exchange rate volatility has effect on the stock market fluctuations is correct”. This hypothesis is specifically being found to be correct in the currency taken as EUR with respect to INR. </li></ul>
  16. 16. Continued…….. <ul><li>Null hypothesis been proved wrong and the hypothesis taken as “H2: Fluctuations in the currency market affect on the balance of trade “has been proved right in case of USD and JPY </li></ul><ul><li>Correlation between the variables does not exist and is proving the null hypothesis Ho to be true as” The volatility in the exchange rate of INR/CHF, EUR and GBP does not affect the variations in the balance of trade. Both go independently. </li></ul>
  17. 17. Discussion

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