Question

Part 1: Individual Market View Report (20%)

Each of you is part of a team and is required to conduct independent research that will feed into your group report. This research consists of outlining and explaining the behaviour of a self-selected pair of exchange rates over the past (i.e., your interpretation of historical data). Your team will select from the following currencies: USD, AUD, JPY, GBP and EUR. You must exclusively choose from currencies listed here and make sure each team member is studying a different currency pair.

This individual part should be a maximum of 700 words in length with a tolerance of + 10%.

In this task, you are required to do some research in order to form a view regarding current and future market conditions.

• Do you think that exchange rates will go up or down in the next 3 to 6 months?
• Explain why you believe the currencies are going to move in these directions?

For this, you should first identify the economic factors that influence the foreign exchange rates (review the course materials). Then you should collect and use financial news and news regarding national and international events which are likely to have an impact on the market.
For news and market data, you may access Eikon Online, a professional financial data platform used by industry practitioners and experts.
Do not simply quote other people’s opinions. You should present your opinion, and explain in your own words why you hold that opinion in a way that shows that you understand the theory behind the determination of the exchange rates. You can certainly quote evidence that supports your opinion, and this evidence must be correctly referenced (do not submit copies of your collected articles with your report).

For your view, you should use at least five references.

Answer 1

The fluctuation in currency is due to Currency exposure :

• Translation or Accounting Exposure - This deals with the exposure arising from the translation of financial statements of the foreign subsidiaries and branches into the parents companies reporting currency. Since no actual cash flows are involved, such an exposure is notional. However, if the market are immature and treat the loss as actual, it starts affecting share price.
• Transaction exposure - This exposure arises when a firm has a known amount of foreign currency payable or receivable the home currency equivalent of which is unknown/uncertain for instance (i) an Indian firm importing goods from Japan and having YEN 40 million payable is afraid of YEN appreciating. (II) an Indian firm exporting goods to UK and having EURO 10 million receivable is afraid of EURO depreciating against Rupees.
• Economic or operating exposure - It is faced by almost all the firms as it can arise even without foreign currency receivable or payable.