1. Forecasting the US Dollar/Euro Exchange Rate Group B John Hottinger Jingyu Nie Katharina Denk Alex Brown Joel Demartini Yuanchen Wang Doug Skipper-Dotta

2. Exchange Rates What are they? What are they? We will be focusing on the U.S. Dollar vs Euro Exchange Rate We will be focusing on the U.S. Dollar vs Euro Exchange Rate An exchange rate is how much one currency is worth compared to another currency An exchange rate is how much one currency is worth compared to another currency Current U.S./Euro 1.4272 i.e. it take $1.43 to buy one Euro Current U.S./Euro 1.4272 i.e. it take $1.43 to buy one Euro

3. Goal We want to forecast what the exchange rate up to 6 months in the future We want to forecast what the exchange rate up to 6 months in the future

4. A look at our data We gathered monthly exchange rate data from www.oanda.com from May 2000 to May 2011. We gathered monthly exchange rate data from www.oanda.com from May 2000 to May 2011.

5. A Trace of the Data

6. Things to note Substantial drop for the U.S dollar compared to the Euro from 2002 to 2008 Substantial drop for the U.S dollar compared to the Euro from 2002 to 2008 Reasons: September 11, 2001. The war in Iraq and Afghanistan, the housing bubble and the U.S. accumulation of massive debt. Reasons: September 11, 2001. The war in Iraq and Afghanistan, the housing bubble and the U.S. accumulation of massive debt.

7. The Histogram

8. The Correllogram

9. Unit Root test

10. What does this all mean The trace is evolutionary The trace is evolutionary In order to forecast or to have a meaningful forecast we need to make the data stationary In order to forecast or to have a meaningful forecast we need to make the data stationary We were able to make the data stationary by using the box jenkins method We were able to make the data stationary by using the box jenkins method

11. Step 1: First differencing

12. Whitened Histogram

13. The Whitened Correllogram

14. Whitened Unit Root Test

15. Alternate Models

16. Building our Final Model We decided to use an intervention model due to the drastic drop in the exchange rate in 2002 We decided to use an intervention model due to the drastic drop in the exchange rate in 2002

17. The Step Function Normal and First Differenced

18. We begin to make our final model

19. Actual Fitted Residual and histogram

20. Serial Correlation Test and Correllogram

21. Looking for Heteroskidasticity

22. Adding a MA(23)

23. The Correllogram

24. Add an MA(26)

25. Actual Fitted Residual and Histogram of Residuals

26. Correllogram of residuals and Serial Correlation Test

28. Time to forecast 6 month whitened forecast 6 month whitened forecast

29. Forecasted Values

30. Forecasting 6 Months Previous

31. Forecasted Values for Previous 6 Months

32. Re-colored Forecast for Following 6 Months

33. Re-Colored Forecast for Previous 6 Months

34. Just because We decided to forecast using exponential smoothing and see how are model would look We decided to forecast using exponential smoothing and see how are model would look

36. Results Exponential Model is very close to what our final model determined Exponential Model is very close to what our final model determined We will have to wait and see if our forecasts are correct We will have to wait and see if our forecasts are correct

37. Thank you!!