Parity Conditions in International

Finance And Currency

Forecasting

The modified Unit 8-4

Dr. Hussein Ghoneim
1
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 2

Arbitrage and the law of one price :

Arbitrage is one of the most important concepts in all finance.
In academic arbitrage, it is possible to trade and generate a
riskless profit without even investing money .
The existence of such academic arbitrage opportunities is
equivalent to money being left on the street without being
claimed. .
The concept of arbitrage is of particular importance in
international finance because so many of the relationships
between domestic and international financial markets , such
as inflation rates , exchange rates , and interest rates
depend on arbitrage for their existence .
Indeed , by linking markets together , arbitrage underlies
the globalization of markets.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 3

• In this unit we emphasizes that currency prices are

determined in the same way that other asset prices are . This
is done by the interaction of supply and demand curves.
• The key concept in this unit is the relationship between
inflation and exchange rate changes:
• The internal devaluation of a currency (inflation) eventually
leads to its external devaluation of a currency (exchange
rate).
• Key Points we can summarize:
• 1. Inflation is the logical outcome of an expansion of the
money supply in excess of real output growth.
• As the supply of one commodity increases relative to
supplies of all other commodities .the price of the first
commodity must decline relative to the prices of other
commodities. In other words , its value in exchange or
exchange rate must decline
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 4

• Accordingly , as the supply of money increases relative to the

supply of goods and services, the price of money in terms of
goods and services must decline, i.e., the exchange rate
between money and goods decline.
• 2. The international parallel to inflation is domestic currency
depreciation relative to foreign currencies. To maintain the same
exchange rate between money and goods both domestically
and abroad , the exchange rate must decline by (approximately)
the difference between the domestic and foreign rates of
inflation . This is purchasing power parity , which is itself based
on the law of one price,
• [Link] the nominal or actual money exchange rate may
fluctuate all over the place, we would normally expect the real ,
or inflation-adjusted exchange rate , to remain constant over
time. A changing real exchange rate is actually the most
important source of money exchange risk.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 5

• In competitive markets , characterized by numerous

buyers and sellers , having low-cost access to
information , exchanged-adjusted prices of identical
tradable goods and financial assets , must be within
transaction costs of equality worldwide.

• This idea , referred to as the law of one price, is

enforced by international arbitrageurs who follow the
profit- guaranteeing dictum of “ buy low , sell high “
and prevent all but trivial deviations from equality.

• Similarly , in the absence of market imperfections ,

risk-adjusted expected returns on financial assets in
different markets should be equal.
 Five key theoretical economic relationships ,
are depicted in the following Exhibit , results
from these arbitrage activities:

.4/1 Purchasing Power Parity (PPP) .

.4/2 Fisher Effect (FE) .
.4/3 International Fisher Effect (IFE).
.4/4 Interest Rate Parity (IRP).
.4/5 Forward Rates as Unbiased Predictors of
Future Spot Rates (UFR).
6
 Inflation
FE
PPP

IFE
Changes in Changes in
Exchange Interest
rates rates

UFR Changes in IRP

Forward
Rates
7
4/1 PURCHASING POWER PARITY (PPP):

4/1/1 introduction
States that the exchange rate of one currency
against another will adjust to reflect changes
in the price levels of the two countries.
That means spot exchange rates between two
currencies will change to reflect the differential
in inflation rates between the two countries.
PPP has been widely used by central banks as
a guide to establishing new par values for their
currencies , when the old ones were clearly in
disequilibrium.
8
 A unit of home currency (HC) should have
the same purchasing power worldwide. Thus ,
if a dollar buys a pound of bread in the United
States, it should also buy a pound of bread in
Great Britain .For this to happen, the foreign
exchange rate must change by
(approximately) the difference between the
domestic and foreign rates of inflation.
This is called purchasing power parity (PPP).

9
4/1/2 The mechanism that exist this
adjustments is simple and direct.
1- As the supply of money increases relative to the
supply of goods and services, causing prices to rise
and the value of local currency to decline .
2- Also ,If saving rate is declined , then extra money
to be spending , causing prices to go up , and the
value of local currency to also decline.
So, generally if the supply of say U.S. dollars exceeds
the amount that individuals wish to hold , individuals
increase their spending , causing prices(inflation) to
rise , and this price inflation as shown in unit (2) will
cause the value of local currency to decline.
10
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 11

• That inflation and currency depreciation are related is no

accident.???????
• Growth of the excess supply of money , through its impact
on the rate of aggregate spending , affects the demand for
goods produced domestically as well as goods produced
abroad.
In turn the domestic demand for foreign currencies changes,
and , consequently , the foreign exchange value of domestic
currency against the foreign currency changes.
• Thus , the rate of domestic inflation and changes in the
• exchange rate are jointly determined by the rate of domestic
• money growth relative to the growth of the amount that
• people, domestic and foreign , want to hold.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 12

3-A further link in the chain relating money-supply growth

with ,( inflation , and exchange rates) ,
Is the notion that money is neutral. That is, money should
have no impact on real variables .

So , if International arbitrage enforces the low of one price ,

then , the exchange rate between the home currency and
domestic goods must equal the exchange rate between the
home currency and foreign goods.
So buying a unit of one product should have the same price
whether that unit of product is produced locally or abroad.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 13

So , a unit of home currency (HC) should have the same

purchasing power worldwide . Thus , if a dollar buys a pound of
bread in the United States , it should also buy a pound of bread
in Great Britain
For this to happen , the foreign exchange rate must change by
(approximately) the difference between the domestic and foreign
rates of inflation.
• This relationship is called purchasing power
parity (PPP).
4/1/3 In order for PPP to exist we
assume:
1. All goods and services are tradable

2. Transportation and other Trading costs are zero

3. Consumers in all countries consume the same proportions

of goods and services

4. Then LAW OF ONE PRICE prevails. So

A. Identical goods sell for the same price worldwide.
B. Theoretical basis:
If the price after exchange-rate adjustment was not
equal, arbitrage worldwide ensures that eventually
it will.
C. Absolute Purchasing Power Parity 14
 In its absolute version, PPP states that price levels
should be equal worldwide when expressed in a
common currency.
In other words, a unit of home currency(HC) should
have the same purchasing power around the world .
So PPP is just an application of the low of one price
to national price level rather than to individual prices.
4/1/4 The relative version of PPP :
PPP which is used more commonly now, states that
The exchange rate between the home currency and
any foreign currency will adjust to reflect changes in
the price levels of the two countries
15
 Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 16

• For example , if the inflation is 5% in United States , and 1 % in

Japan , then the dollar value of the Japanese yen must rise by
about 4% to equalize the dollar price of goods in the two
countries.

• So, money that is neutral, should have no impact on real

variables.
• The requirement that the PPP theorem holds at all times means
that the exchange rate must change proportionately to the
relative price level in the two currencies .
• It rests on the assumption that free trade will equalize the price
of any good in all countries.
• Any other exchange rate would create an arbitrage situation.
• However PPP ignores the effects of, transportation costs, tariffs,
quotas, other restrictions , and product differentiation.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 17

To illustrate how the flow of payments between residents of one

country and the rest of the world (i.e. the balance of payments),
influences exchange rates , consider the following example
.
A country , Importeria, trades with other countries and always
imports more goods than it exports .

It must pay for these goods in some way , so we assume that

the government of Importeria simply prints additional currency
to pay for the excess goods that it imports.
A country such as Importeria might continue to import more
than it exports for quite some time without causing a change in
the fixed exchange rate.
However , even this fixed exchange rates would be only fixed
in the short run , and are subject to periodic adjustments .
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 18

The accumulation of its additional printed currency might

continue until there is an excess supply at the prevailing
exchange rate , so the value of Importeria`s currency must fall .
The value of Importeria currency are said to have been
devalued, however ,the value of other currencies will increase
relative to Importeria`s ,so these currencies are
said to have been revalued.
In effect central banks would be absorbing the excess
supply of Importeria`s currency for some time .
However the central banks become unable , or unwilling to
purchase all of the currency that is supplied. If it continues, it
would soon face many times of devaluation.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 19

BigMac Example:

BigMac is produced in almost 120 countries. Its cost should be

the same worldwide.
So, price of BigMac can determine whether a local currency is
over-or-under valued under the assumption that the service and
quality offered is the same for all BM, and also assuming that BM
is representing all other prices of the other products . Some
terminology is in order.

(Forward premium) = (forward rate –spot rate) X 360 eq (4.1 )

or discount Spot rate forward contract
number of days)
So , if inflation in ,say , Mexico is expected to exceed inflation in the U.S. by
3% for the coming year . Then the Mexican peso should decline in value by
about 3% relative to the dollar in spot market.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 20

By the same token,1-year forward Mexican peso should

sell at 3% discount relative to the U.S . Dollar .
Similarly ,1-year interest rates in Mexico should be about
3% higher than 1-year interest rates on securities of
Comparable risk in the United States .
• By the same token ,the 1-year forward Egyptian pound should
sell at a 25% discount relative to the U.S. dollar if the inflation
rate in Egypt exceeds the inflation rate in U.S. by 25%.
• Similarly1-year interest rate in Egypt should be about 25%
higher than 1-year interest rates on securities of comparable
risk in the united states.
• The common denominator of these parity conditions is the
adjustment of the various rates and prices to inflation.
 Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 21

Example:
If BM in the U.S.A. = $4.56 & in Euro area = €3.62
• Then the implied PPP exchange rate of $ is €3.62 = $4.56, then
3.62
$1.0 = = €0.80, however actual exchange rate is $ /€=0.78,
4.56
so the value of € in terms of $’s (in ppp) is

𝑷𝑷𝑷 𝒆𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒆 −𝑨𝒄𝒕𝒖𝒂𝒍 𝒆𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒆

𝑨𝒄𝒕𝒖𝒂𝒍 𝒆𝒙𝒄𝒉𝒂𝒏𝒈𝒆 𝒓𝒂𝒕𝒆

𝟎.𝟖𝟎−𝟎.𝟕𝟖 𝟎.𝟎𝟐
= = = 𝟐. 𝟐𝟓
𝟎.𝟕𝟖 𝟎.𝟕𝟖
• So, the Euro is practically (in PPP) has more value than the
actual value of € w.r.t. $.Then the exchange rates must be
adjusted to keep the relative value of the two
• currencies consistent with the relative purchasing power of the
two currencies.
•
4/1/5 In mathematical terms:

et (1 + ih )
t
a- eq (4.2)
=
e0 (1 + i ) t
f
where et = future spot exchange rate in period t.
e0 = spot exchange rate in period zero.
ih = home inflation expected rate
if = foreign inflation expected rate
t = time period
22
PURCHASING POWER PARITY

b- If purchasing power parity is

expected to hold, then the
best prediction (PPP) for the one-
period spot rate should be

(1 + ih )
t

eq(4.3) et = e0
(1 + i )
t
f

23
 PURCHASING POWER PARITY

C- A more simplified but less precise

relationship is (subtract 1 from both sides in 4.2 )

et − e0
Eq (4.4) = ih − i f
e0
that is, the percentage change in rates should be
approximately equal to the inflation rate differential.
(assuming Foreign inflation rate is small enough)
24

Since RHS should be divided by (1+if )

PURCHASING POWER PARITY

d- In effect PPP says

the currency with the higher inflation
rate is expected to depreciate relative to
the currency with the lower rate of
inflation.
We can also say, the theory holds up
well in the long run, but not as well over
shorter time periods.
25
Sample Problem

Projected inflation rates for the U.S. and Germany

for the next twelve months are 10% and 4%,
respectively. If the current exchange rate is
$.50/Dm, what should the future spot rate be at
the end of next twelve months?

(1 + ih ) e1 = .50(1.0577)
t

et = e0
(1 + i )
t
f

(1.10 ) e1 = $.529
1

e1 = .50
(1.04 )
1

26
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 27

4/1/6 The lesson of Purchasing Power Parity:

PPP bears an important message: Just as the price of goods in
one year cannot be meaningfully compared with the price of goods
in another year without adjusting for interim inflation , so exchange
rate changes may indicate nothing more than the reality that
countries have different inflation rates.
In fact, according to PPP , exchange rate movements should just
cancel out changes in the foreign price level to the domestic price
level.
These offsetting movements should have no effects on the relative
competitive positions of domestic firms and their foreign
competitors.
The general conclusion from empirical studies of PPP is that the
theory holds up well in the long run , but not as well over shorter
time periods.
Despite substantial short-run deviations from PPP, currencies
have a distinct tendency to move toward their PPP- predicted
rates.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 4) 28

Deviations from PPP , however, will lead to real exchange gains

and losses . Consequently , the value of higher- inflation
currencies will tend to be depressed relative to the value of
lower-inflation currencies . Other things being equal , changes in
expected , as well as actual inflation , will cause the exchange
rate changes .
If the real exchange rate remains constant (i.e. if PPP holds),
currency gains or losses from nominal exchange rate changes
will generally be offset over time by the effects of differences in
relative rates of inflations , thereby reducing the net impact of
Nominal devaluations and revaluations.
So if changes in the nominal exchange rate are fully offset by
changes in the relative price levels between two countries , then
the real exchange rate remains unchanged.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 29

Also , exchange-adjusted prices are not only for identical

tradable goods but also for financial assets which must be
within transaction costs of equality worldwide .

Similarly, in the absence of market imperfections, risk adjusted

expected returns on financial assets in different markets should
be equal . ideas are formalized also as Fisher effect (FE) .

Similarly , the nominal interest rate , the price quoted on lending

and borrowing transactions , determines the exchange rate
between current and futures dollars .

For example , an interest rate of 10% on a 1-year loan means that

one dollar today is being exchanged for 1.1 dollars a year from
now.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 30

But what really matters, according to the Fisher Effect (EF) , is

the exchange rate between current and future purchasing
power , as measured by the real interest rate

Simply put it this way , the lender is concerned with how many
more goods can be obtained in the future by consumption
today ,
whereas the borrower, wants to know how much future
consumption must be sacrificed to obtain more goods today.

This condition is the case regardless of whether the borrower

and lender are located in the same or different countries.
Dr. Hussein Atta Ghoneim(Derivatives – Unit 8) 31

As a result ,
if the exchange rate between current and future goods (the real
interest rate) varies from one country to the next , arbitrage
between domestic, and foreign capital markets , in the form of
international capital flows , should occur .
These flows will tend to equalize real interest rates , across
countries.
• By looking more closely at these and related parity conditions ,
we can see how they can be formalized and used for
management purposes.
4/2 THE FISHER EFFECT:
The interest rate that are quoted in the financial press are
nominal rates . But what really matters to both parties to a loan
agreement is the real interest rate , the rate at which current
goods are being converted into future goods.
Looked at one way , the real rate of interest is the net increase
in wealth that people expect to achieve when they save and
invest their current income.
Alternatively , it can be viewed as the added future consumption
promised by a corporate borrower to a lender in return for the
latter’s deferring current consumption . From the company’s
(borrower) standpoint , this exchange is worthwhile as long as it
can find suitably productive investments.
32
However , because virtually all financial contracts are stated in
nominal terms , the real interest rate must be adjusted to
reflect expected inflation , specially there exists often lengthy
departures from PPP.
The Fisher effect states that the nominal interest rate (r)is made
up of two components :
- a real required rate of return (a) ,and
- an inflation premium equal to the expected amount of
inflation (i).
Formally ,the Fisher effect is
(1+Nominal rate) = (1+Real rate) X (1+Expected inflation rate )
(1+r) = (1+a)(1+i) or , r = a + i + ai eq (4.5)
Which is often approximated by r=a + i. eq (4.6)

33
The real rate is actually =(r - i)/(1+i) ,so if the inflation rate is
10%, and the real rate is 3% , that means the nominal interest
rate needed to have 3% real rate at the end of the year is
(r%-10%)/(1+10%)=3% , so r=13.3% , otherwise an arbitrage
situation can exists.
So , the generalized version of the Fisher asserts that real returns
are equalized across countries through arbitrage-that is rh=rf .
This process of arbitrage would continue , in the absence of
government intervention , until expected real returns were
equalized.
In equilibrium , then , with no government interference , it
should follow that the nominal interest rate differential will
approximately equal the anticipated inflation differential between
the two currencies.
rh - rf = ih - if eq(4.7)
34
 So the real interest rate should tend toward equality
everywhere through arbitrage .
Funds should flow from the home country to the foreign country
to take advantage of the real differential . This flow will continue
until expected real returns are again equal.
Moreover , significant real interest rate differentials would not
survive long in the increasingly internationalized capital markets.
The empirical evidence is consistent with the hypothesis that most
of the variation in nominal interest rates across countries can be
attributed to differences in inflationary expectations .
In effect , the generalized version of the Fisher effect says that
currencies with high rates of inflation should bear higher interest
rates than currencies with lower rates of inflation.
35
To the extent that real interest differentials do exist , they must
be due to either currency risk or some form of political risk .
In addition to currency and inflation risk , real interest rate
differentials in a closely integrated world economy can stem
from countries pursuing sharply differing tax policies or imposing
regulatory barriers to the free flow of capital . In many developing
countries , however currency controls and other government
policies impose political risk on foreign investors.
Hence , real interest in developing countries can exceed those
in developed countries without presenting attractive arbitrage
opportunities to foreign investors .
The combination of a relative shortage of capital and high political
risk in most developing countries is likely to cause real interest
Rates in these countries to exceed real interest rates in developed
countries . 36
All financial transactions , no matter how complex ,
ultimately involve exchanges of goods in the future . You
supply credit (capital) when you consume less than you
produce ; you demand credit when you consume more
than you produce .
Thus, the supply of credit can be thought of as the excess
supply of goods and the demand for credit as the excess
demand for goods .
When we add up the capital markets around the world,
we are adding up the excess demands and supplies of
goods . A car still a car ,whether it is valued in yen or
dollars.

37
4/3 THE INTERNATIONAL FISHER EFFECT:
The key to understanding the impact of relative
changes in nominal interest rates among countries , on
the foreign exchange value of nation’s currency , is to
recall the implication of
1-PPP which implies that exchange rates will move to offset
changes in inflation rate differentials .Thus , arise in the U.S.
inflation rate relative to those of other countries will be
associated with a fall in the dollar`s value.
2-Similarly ,a rise in nominal interest rates relative to foreign
interest rates ( real interest rates should be constant) will be
associated with a fall in the dollar’s value , (FE)
Combine these two conditions , the result is the
international Fisher effect (IFE)
38
IFE STATES:
A. the spot rate adjusts to the interest rate differential between
two countries.
B. IFE = PPP + FE .According to eq(4.8),the expected return
from investing at home , (1+rh ) should equal the expected HC
return from investing abroad(1+rf)X(e1/e0)
(1 + rh )
t
et
=
(1 + r )
t
e0
f
eq (4.8)
C. Fisher postulated
1. The nominal interest rate differential should reflect the
inflation rate differential.

39
D. Simplified IFE equation

et − e0
rh − rf = eq(4.9)

e0
40
E. Implications if IFE is at work:
[Link] with the lower interest rate expected to appreciate
relative to one with a higher rate.
If the ¥/$ spot rate is ¥108/$ and the interest rates in Tokyo and
New York are 6% and 12%, respectively, what is the future spot
rate two years from now?

(1 + rh )
t

et = e0 e2 = ¥96.74 / $
(1 + r )
t
f

(1.06 )
2

e2 = 108
(1.12 )
2

e2 = 108
(1.1236 )
(1.2544 ) 41
4/4 INTEREST RATE PARITY THEORY
I. INTRODUCTION
A. The Theory states:
the forward rate (F) differs from the spot rate (S)
at equilibrium by an amount equal to the interest
differential (rh - rf) between two countries.
B. The forward premium or discount equals

C. the interest rate differential.

(F – S)/S = (rh - rf) eq (4.10)

where rh = the home rate
rf = the foreign rate
F = the forward rate
S = the spot rate 42
 The movement of funds between two currencies to take
advantage of interest differentials is a major determinant of
the spread between forward and spot rates.
In fact , the forward discount or premium is closely related to
interest differential between the two currencies.
According to interest rate parity (IRP) theory , the currency of
the country with a lower interest rate should be at a forward
premium in terms of the currency of the country with the
higher rate.
More specifically , in an efficient market with no
transaction costs , the interest differential should be
(approximately) equal to the forward differential.
When this condition is met , the forward rate is said to be at
interest rate parity ,and equilibrium prevails in the money
markets. 43
IRP ensures that the return on a hedged (or covered) foreign
investment will just equal the domestic interest rate on
investments of identical risk ,thereby eliminating the
possibility of having a money machine.
When this condition holds , the covered interest differential ,
the difference between the domestic interest rate and the
hedged foreign rate , is zero.
If the covered interest differential between two money
markets is nonzero , there is an arbitrage incentive to move
money from one market to the other.
This movement of money to take advantage of a covered
interest differential is known as covered interest arbitrage.
The process of covered interest arbitrage will continue until
interest parity is achieved , unless there is government
interference.
44
Interference often occurs because many governments regulate
and restrict flows of capital across their borders.
Moreover , just the risk of controls will be sufficient to yield
prolonged deviations from interest rate parity.
For interest arbitrage to occur , the covered differential must
exceed the transaction costs involved.
IMPIRICAL EVIDENCE
IRP is one of the best-documented relationships in international
finance. In fact , in the Eurocurrency markets , the forward rate
is calculated from the interest differential between the two
currencies using the no-arbitrage condition.
Deviation from IRP do occur between national capital markets ,
however , owing to capital controls( or the threat of them) ,the
imposition of taxes on interest payments to foreigners , and
transaction costs . These deviations tend to be small and short-45
lived.
C. In equilibrium, returns on currencies will be the same
i. e. No profit will be realized and interest rate parity exists

F (1 + rh )
which can be written

=
S (1 + rf )
eq(4.11)

D. Covered Interest Arbitrage

1. Conditions required:
interest rate differential does not equal the forward
premium or discount.
2. Funds will move to a country with a more attractive rate

46
3. Market pressures develop:
a. As one currency is more demanded spot and sold
forward.
b. Inflow of funds depresses interest rates.

c. Parity eventually reached.

E. Summary:
Interest Rate Parity states
1. Higher interest rates on a currency offset by forward
discounts.
2. Lower interest rates are offset by forward premiums.

47
If the Swiss franc is $.68/SF on the spot market and the annualized
interest rates in the U.S. and Switzerland, respectively, are 7.94% and
2%, what is the 180 day forward rate under parity conditions?

f t = e0
(1 + rh )
(1 + r ) f

 .0794 
 1 + 
= .68  
2
f180
 .02 
1 + 
 2 
f180 = $.70 / SF 48
4/[Link] relationshep between the forward rate
and the expected future spot rate:

I. THE UNBIASED FORWARD RATE

A. States that if the forward rate is unbiased, then it
should reflect the expected future spot rate.
B. Stated as
eq (4.12) F0,t =E0t(S0)
In the absence of government intervention in the market ,
both the spot rate and forward rate are influenced heavily by
current expectations of future events.
The two rates move in tandem , with the link between them
based on interest differentials.
49
New information , such as a change in interest rate
differentials , is reflected almost immediately in both spot
and forward rates.
Ignoring risk for the moment, equilibrium is achieved only
when the forward differential equals the expected change in
the exchange rate.

50
PART 4/7 :CURRENCY FORCASTING
Forecasting exchange rates has become an occupational hazard
for financial executives of multinational corporations.
The potential for periodic , and unpredictable , government
intervention makes currency forecasting all the more difficult.
The two principal model-based approaches to currency
prediction are known as:
-Fundamental analysis ,and
- Technical analysis.
An alternative forecasting approach in such a controlled
environment is to use Black-Market exchange rates as useful
indicators of devaluation pressure on the nation`s currency
51
The two principal model-based approaches to currency prediction
are known as:
-Fundamental analysis ,and
-Technical analysis.
An alternative forecasting approach in such a controlled
environment is to use Black-Market exchange rates as useful
indicators of devaluation pressure on the nation`s currency.
Black-market rate tends to be a good indicator of where the
official rate is likely to go. It seems to be most accurate in
forecasting the official rate 1 month ahead and is progressively
less accurate as a forecaster of the future official rate for longer
time periods.

52
 THE END

Unit 4

[Link] Ghoneim
53