1. Case1: Exchange Rate Projections. Casullo Financial Services (CFS). Zhen Qi

2. Outline  Purpose of this Case  Models used for this Case Study  Test the forecasting skills of the models for USD to GBP, JPY, MXN, and KOW  Out-of-sample forecasts of the Models for USD to GBP, JPY, MXN, and KOW  Select the "best" model  Project the exchange rate for the GBP and JPY through 2012:2 using the best Model

3. Purpose of this Case  Select the "best" model among (A) Forward exchange rates. (B) Ad-hoc economic models. (c) PPP. (D) Monetary approach.  Forecasting Exchange rate for USD to GBP, JPY, MXN, and KOW (Korean Won) for the time period 2011:3~2012:2

4. Models used for Case Study 1. Forward exchange rates, Linear IRP approximation: F t,T  S t [1 + (i d - i f ) x T/360], 2. Ad-hoc economic model S d/f,t = a 0 + a 1 (I d – I f ) t + a 2 (y d – y f ) t + ε t 3. Relative PPP simplified Model s t,T  e f,T PPP  I d – I f 4. Monetary approach s t,T = y f,T - y d,T + m Sd,T - m Sf,T

5. Test the forecasting skills  The forecasting skills of these 4 models were tested based on the information available at the end of 2010:2.  The in-sample performance of the models were evaluated by evaluating the signs, the t-statistics, and the R-squared coefficients.  The above tasked were tested using the data available for the USD/GBP, USD/JPY, USD/MXN, and USD/KOW

6. USD/GB P

7. USD/GBP: linear IRP approximation

8. USD/GBP: Ad-hoc economic models

9. USD/GBP: Relative PPP

10. USD/GBP: Monetary approach

11. Out-of-sample forecasts  Quarterly out-of-sample forecasts for USD/GBP during 2010:III–2011:II  Check the quality of the forecasts by examining the Mean-squared error (MSE)

12. IRP & ad-hoc

13. Relative PPP & Monetary Approach

14. RWM

15. Performance Comparison

16. USD/JPY

17. USD/JPY: linear IRP approximation

18. USD/JPY: Ad-hoc economic models

19. USD/JPY: Relative PPP

20. USD/JPY: Monetary approach

21. Out-of-sample forecasts  Quarterly out-of-sample forecasts for USD/JYP during 2010:III–2011:II  Check the quality of the forecasts by examining the Mean-squared error (MSE)

22. IRP & ad-hoc

23. Relative PPP & Monetary Approach

24. RWM

25. Performance Comparison

26. USD/KO W

27. USD/KOW: linear IRP approximation

28. USD/KOW: Ad-hoc economic models

29. USD/KOW: Relative PPP

30. USD/KOW: Monetary approach

31. Out-of-sample forecasts  Quarterly out-of-sample forecasts for USD/KOW during 2010:III–2011:II  Check the quality of the forecasts by examining the Mean-squared error (MSE)

32. IRP & ad-hoc

33. Relative PPP & Monetary Approach

34. RWM

35. Performance Comparison

36. USD/MX N

37. USD/MXN: linear IRP approximation

38. USD/MXN: Ad-hoc economic models

39. USD/MXN: Relative PPP

40. USD/MXN: Monetary approach

41. Out-of-sample forecasts  Quarterly out-of-sample forecasts for USD/MXN during 2010:III–2011:II –i.e.,  Check the quality of the forecasts by examining the Mean-squared error (MSE)

42. IRP & ad-hoc

43. Relative PPP & Monetary Approach

44. RWM

45. Performance Comparison

46. Select the "best" model

47. Project the exchange rate for the GBP and JPY through 2012:2 using IRP

48. END