Page 193 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 16 : Theories of Determination of Exchange Rate (Portfolio and Balance of Payments)

4. Econometric Models Notes
The econometric models in their attempt to forecast the exchange rates take into consideration
other factors that are regarded as determinants of the exchange rates. More specifically: inflation,
the relative19 GDP levels, the relative interest rates, and the relative money supply.
Although the econometric models perform well in general, we can argue that these models do
not lead to reliable forecasts because they use in many cases 'past' data.
In addition, it can be argued that empirical studies indicate that the ability of such models to
forecast is greater in the long term than in the short term.
5. Technical Analysis Forecasting
In contrast to the fundamental analysis that considers financial data, the technical analysis
analyses diagrams based on past data. More specifically, it accepts the following:
The market is efficient (all information is incorporated into the prices).
The prices are moved by trend.
The history repeats itself.
The technical analysis takes into consideration indicators, such as moving averages and oscillators,
the volume of transactions, trend lines, and time or price filters, and it combines their trend according
to some charting rules.20Then in turn the technical analysis tries to identify the future price and
anticipate the price patterns in the financial and commodity markets.
The applied chartist techniques, either on bar charts or on candlestick21 charts, lead to more reliable
forecasts when dealing with short-term periods.
Self-Assessment
1. Choose the correct options:
(i) If the U.S. dollar depreciates in terms of the Euro:
(a) American goods would be cheaper for Europeans.
(b) Americans would have to pay fewer dollars for one Euro.
(c) The relative price of U.S. exports would rise.
(d) European goods would be cheaper for Americans.
(ii) What accounts for most of the activity in the foreign exchange market?
(a) Interbank trading
(b) Currency trade among central banks
(c) Trading currency between importers and exporters
(d) Trading by financial institutions
(iii) Which of the following is NOT a major currency trading center?
(a) Chicago (b) Tokyo
(c) London (d) New York
(e) Frankfurt
(iv) What is the "arbitrage" opportunity in the foreign exchange market?
(a) A cross-rate.
(b) A difference between the exchange rate for buying and selling the currency from the
same bank.
(c) A difference between the exchange rates in different trading centers.
(d) A fee that brokers charge for trading currency of their clients.
(v) If a contract contains a promise that a specified amount of foreign currency will be delivered
on the specified date in the future, this is:

LOVELY PROFESSIONAL UNIVERSITY 187