GD30903 International Financial Economics Assignment

Assignment Help International Economics

Reference no: EM132558774

GD30903 International Financial Economics - University Malaysia Sarawak

Topic: FORECASTING EXCHANGE RATES

GD30903 Inc., a Malaysia-based MNC, has foreign subsidiaries in 3 countries (choose any 3 currencies from your group members' Individual Projects). Its subsidiaries periodically obtain the Malaysian ringgit (MYR) to purchase the Malaysian products. It assesses the historical exchange rates to develop a market-based forecast for the value of foreign currency in terms of domestic currency. In this forecast model, you use the spot rate to forecast the future spot rate. Assume that the following regression model was applied to historical daily exchange rates over the sample period (28 Jan - 31 May 2020):

S_t = a₀ + a₁S_t-1 + u_t (1)

where
S_t is the logarithm of nominal exchange rate (it is expressed as the number of MYR equals to one unit of foreign currency) in the current period;
S_t-1 is the logarithm nominal exchange rate (it is expressed as the number of MYR equals to one unit of foreign currency) in the previous period;
a₀ and a₁ are regression coefficients; and
u_t is error term.

Using regression (1),

Part 1. Estimate a regression equation for each foreign currency (See the Video entitled "Regression Analysis" for help on conducting regression analyses).

Part 2. Forecast the daily value of each foreign currency.

Part 3. Based on your forecast in (Task 2), do you think the market-based forecast will predict appreciation, depreciation, or no change in the value of each foreign currency? Verify your conclusion.

Part 4. Determine the absolute forecast error as a percentage of the realized value for the daily value of each foreign currency.

Part 5. Based on your estimation in (Task 4), have your forecasts improved in the last 4 months?

Part 6. Determine the mean absolute forecast error as a percentage of the realized value for the daily value of each foreign currency over the whole sample period.

Part 7. The ability to forecast currency values may vary with the currency of concern. Based on your estimation in (Task 6) for each subsidiary, which forecast has a lower forecast error on average? Verify your conclusion.

Attachment:- International Financial Economics.rar

Reference no: EM132558774

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