1. Casullo Financial Services
Ya-Ling Chuang (Ambrosia)
Udayan Shah
Scott Holtorf
Supradipta Datta

2. Casullo Financial Services
Exchange Rate Projections
For
Nike Inc.

3. Casullo Financial Services
Four Models:
The Purchase Power Parity Model (PPP)
The Monetary (Asset) Approach
Forward Exchange Rate Model
Ad-hoc Model

4. Casullo Financial Services
The PPP Model
SFt+1 = SFt * [ 1 + sFt+1]
MAE 0f ε = SFt+1 – St+1
In –sample:
sFt= Id,t – If,t
where Id,t+1 = CPId,t+1/CPId,t
SFt = St

5. Casullo Financial Services
The PPP Model
SFt+1 = SFt * [ 1+ sFt+1]
out-of-sample:
Regress the equation
It+1 = α0 + α1(It) + εt
sFt+1 = Id,t+1 – If,t+1

6. Casullo Financial Services
The Monetary (Asset) Approach
SFt+1 = SFt * [ 1+ sFt+1]
MAE 0f ε = SFt+1 – St+1
In –sample:
st,T = yf,T – yd,T +mSd,T – mSf,T
SFt = St

7. Casullo Financial Services
The Monetary (Asset) Approach
SFt+1 = SFt * [ 1+ sFt+1]
MAE of ε = SFt+1 – St+1
out-of-sample:
After Regression Analysis
sFt+1 = α0 + α1(yf,t – yd,t) + α2(md,t – mf,t)

8. Casullo Financial Services
Expectation Hypothesis
SFt+1 = SFt * [1 + sFt]
MAE of ε = SFt – St
in-sample:
sFt = (id,t – if,t) * T/360
SFt = St

9. Casullo Financial Services
Expectation Hypothesis
SFt+1 = SFt * [1 + sFt]
MAE of ε = SFt – St
out-of-sample:
sFt = (id,t – if,t) * T/360
Use of random walk in estimating (id,t – if,t)

10. Casullo Financial Services
Ad-hoc Model
SFt+1 = SFt * [1 + sFt+1]
MAE of ε = SFt – St
in-sample:
sFt = α + ß1(Id,t – If,t) + ß2 [(id,t – if,t) * T/360]
+ ß3 (yd,t – yf,t) + εt
SFt = St

11. Casullo Financial Services
Ad-hoc Model
SFt+1 = SFt * [1 + sFt+1]
MAE of ε = SFt – St
out-of-sample:
Random Walk used in estimating (Id,t – If,t), (id,t – if,t) and (yd,t – yf,t).

12. 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
AD HOC
0.0606
0.1426
Random Walk
0.0630
0.0298
RSQ
t-stats
0.0851
-0.39, -2.29, -0.79

13. Casullo Financial Services

14. 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

15. Casullo Financial Services

16. 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
AD HOC
Random Walk
RSQ
t-stats
0.1645
-.133, -3.28, 1.48

17. Casullo Financial Services

18. 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

19. Casullo Financial Services

20. Casullo Financial Services

21. Casullo Financial Services
USD/KRW
In Sample MAE
Out of Sample MAE
PPP
E-4
2.0495E-4
MAA
1.2164E-4
5.9246E-5
FWD EX
7.700E-5
1.1752E-4
AD HOC
3.786E-5
Random Walk
3.824E-5
2.198E-5
RSQ
t-stats
0.4187
3.48, 1.80, .84

22. Casullo Financial Services

23. 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

24. 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

25. Casullo Financial Services

26. 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
AD HOC
Random Walk
RSQ
t-stats
0.1645
-.133, -3.28, 1.48

27. Casullo Financial Services