Introduction
No state is self sufficient ; every state is depended on the other state for some goods and services. The purpose of holding the foreign exchange market is to advance international trade and investing. The foreign exchange market does non hold any glade house or cardinal exchange house and it is one of the largest fiscal markets in the universe. London exchange is one of the largest amongst the planetary foreign exchange markets. Foreign exchange is the market that ne’er sleeps ; it works round the clock with different purchasers and Sellerss from different states except for weekends. With the addition in trading volume, it signifies growing in international trade and investings. For the past several old ages, the planetary market has changed drastically and schemes play an of import function in minimising the hazard and maximising the portfolio returns.
The foreign exchange market is really volatile and they determine the comparative values of different currencies. The British Pound Sterling was used for settling trade differences between states and is a major modesty currency like USD which is retained by authorities. British Pound still remains as a major international currency owing to big size of British economic system and extremely sophisticated fiscal sector. Pound Sterling is the 3rd most popular modesty currency in the universe after USD and Euro. This indicates that the foreign cardinal Bankss are purchasing and hive awaying big sum of lbs as a modesty capital so as to avoid any fluctuation of their ain currency. The chief aim of this paper is to analyze, analyse and compare the behavior of four different currencies ( viz. US Dollar, Euro, Indian Rupee and Chinese RMB ) against Pound Sterling utilizing descriptive statistics for investor ‘s information. Before traveling farther, allow ‘s expression at some of the background of these currencies for a better apprehension.
Backgrounds
United States Dollar is normally referred as ‘American dollar ‘ and is denoted by USD or by the symbol ‘ $ ‘ . The history of dollar revolves around many states in different continents and it was first issued in 1519. The American currency was officially known as the colonial book in earlier yearss and it was tantamount to goods and services in the economic system. The US Dollar is intensively traded worldwide and it accounts for 87 % planetary dealing. Dollar is globally accepted because of its function in investing currency in capital market, reserve currency in Cardinal Banks and dealing currency in international trade good markets.
Euro
The Euro was launched on 1st January 1999 as an electronic currency in conformity with Maastricht Treaty. It became a legal stamp on 1st January 2002 ; nevertheless, the entry of Euro marks the issue of 12 other national currencies in Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, Austria, Netherlands, Finland, Greece and Ireland severally. The involvement rates are determined by the European Central Banks which is based in Frankfurt. The benefit of presenting Euro was to take currency hazard for those companies runing across different states. This has helped the companies to cut down big sum of dealing cost which in bend gave them a higher net income.
Chinese Renminbi
The official currency of People ‘s Republic of China is Renminbi ( which mean people’s currency in Chinese ) . The official ISO 4217 abbreviation of China ‘s currency is CNY and it is besides abbreviated as RMB. In 1949, the first RMB was issued before the coup d’etat of Mainland China by the Communists. A double currency system was established when the Chinese economic system opened up in 1978, RMB could be used domestically merely and for aliens, they had to a foreign exchange certifications. The unrealistic degree at which exchange rates were nailed upon led to a guess in currency minutess. People ‘s Republic of China worked to do RMB more exchangeable. The double currency system came to an terminal and exchange rate was brought to realistic degree through the usage of barter Centres. The rating of RMB has drawn a great trade of attending and force per unit area on developed states for reappraisal.
Indian Rupee
Indian Rupee ( INR ) was available in different signifier in different parts of India. It was merely after independency ( 1947 ) , the INR was made into individual currency for Republic of India. With recent roar in the Indian economic system and trade and rise in economic growing has made Indian Rupee stronger. On 15 July 2010, the new symbol for Rupee was implementing and its chief purpose was to tag the turning importance in World ‘s economic system. India is one of the fastest turning economic systems along with China and during the planetary crisis, India economic growing ne’er slowed down which reflects the strength of the economic system. In India, the currency fluctuation is controlled by the Reserves Bank of India.
Methodology
For the analysis of behavior of different currencies in the planetary market:
Five yearss traveling mean informations of four old ages has been collected ( i.e. from 01 June, 2005 to 31 May, 2009 ; beginning – DataStream ) .The intent of utilizing traveling mean informations is that it tends to smoothen the monetary value which so gives the tendency or an index whether the monetary value is traveling up or down.
Compare and contrast the behavior of all four currencies during the twelvemonth 2005 to 2009
Comparison of single twelvemonth ‘s information is made.
The parametric quantities used for mensurating the behavior of the currencies are
- Mean
- Manner
- Standard Deviation and
- Discrepancy
Calculation
Mean:
- normally referred as norm and the expression usage for ciphering the mean is
- Exchange rates
- No of elements
Manner: i
- s the value of exchange rate which appears most frequently in the given informations.
Standard Deviation:
Discrepancy:
- is the square of standard divergence i.e. ( SN )
- Notes: 1.SD bases for standard divergence, 2. VAR is the discrepancy
- Figures rounded up to four decimals topographic point.
- MIN-means lower limit or the lowest exchange rate,
- MAX-means upper limit or the highest exchange rate.
Table 1 represents the drumhead statistic of the currency exchange rate for all four old ages that is from 1st June 2005 to 31st May 2009. From the above tabular array, we can see that the mean exchange rates for each single currency against the British Pound are USD 1.8358, RMB 13.8462, Euro 1.3767 and INR 80.5642 severally. This means that the exchange rate for the last four old ages stood nigh at about this exchange rate. The per centum alteration could be positive or negative but the alteration is really infinitesimal. But for an investor ‘s position, a little fluctuation in the currency rate can hold a immense impact on their returns.
Let us take an illustration of importer from United States who wish to import goods from the United Kingdom and the estimated disbursals about about 500,000 Pound a twelvemonth and the rate of exchange for USD at that point of clip is 1.8358 which mean the importer has to pay 917,900 USD equivalent ( 1.8358*500,000 ) a twelvemonth. Now if the lb rate goes up to 1.8360, it means the importer has to pay more in footings of USD i.e. 918,000 ( 1.8360*500,000 ) which is a loss. So to extenuate such sort of a loss, the importer can come in into a forward contract where the monetary value will be fixed at one rate even though it may travel up in the hereafter, so when it is clip for the importer to do the payment he can profit from such uncertainnesss and losingss.
Foreign exchange market is the most volatile market ; any intelligence that flashes in the economic system causes fluctuation in the exchange rate. Therefore, it is really of import to understand the hazards associated with each currency, we all know that higher hazard will give higher returns. Return is the primary motivation factor that drives investings. Hazard is by and large denoted by the symbol ( ? ) , in other words it is standard divergence. If, we look carefully at table 1, the hazard of Indian currency is the highest amongst all which is non a good indicant for an economic system. The lowest exchange rate for the period 01/06/2005 to 31/05/2009 against Pound Sterling stood at 1.3669 USD, 9.34685 RMB, 1.0408 Euro and 67.3335 Indian Rupee severally. Similarly, the highest exchange rate during that period was 2.0947 US Dollar, 15.5665 RMB, 1.5252 Euro and 88.9596 Indian Rupee against Pound Sterling. Further, from table, manner indicates the value of the currencies which appears most frequently was USD1.7715, RMB 15.3862 and Euro 1.4674 severally. This means that the currency rate is likely traveling to be repeated once more in future.
Graph demoing the motion of currencies in the planetary market from mid 2005 to mid 2009.
Beginning: Thompson Reuters Data Stream
From the given graph, we can see the tendency in which the currencies are traveling. However, one common thing among all four currencies is the worsening tendency. Let’s start with Chinese RMB, the exchange rate as on 03 June 2005 was 15.0333 and it went down farther until mid 2006 and so get downing lifting once more in 2007 and it remained stable for the full twelvemonth 2007 so once more started dropping in the early 2008 till get downing of 2009 and have started to lift once more. The fluctuation was chiefly because of the Asiatic fiscal crisis which easy spread across the state. Euro seems to be running parallel with Chinese RMB as indicated by the graph. The Indian Rupee were the most distressing currency as there was a immense fluctuation compared with the other currencies. On 23 January 2009, the Indian Currency fell every bit low as INR 67.3335 which is the lowest boulder clay day of the month. On the other manus the US Dollar seems to be making reasonably good in the beginning and it started to fall drastically in 2008. We will further analyze all four currencies separately utilizing different statistics and graphs.
From the twelvemonth 2005 to 2006, we can see the mean exchange rate for USD, RMB, Euro and Indian Rupee was 1.7752, 14.3666, 1.4642 and 78.8929 severally. The minimal exchange rate for USD for the period was 1.7138 and the upper limit was 1.8903 and likewise we can take the lower limit and maximal exchange rate for the other currencies as good from the given table 2. In this period, USD and Euro have the same exchange rate which got repeated at 1.7715 and 1.4674 severally. Further, if we look at the standard divergence for each currency, the Indian currency is the highest so followed by Chinese RMB. This is one of major ground why there is so much fluctuation in the Indian Currency presented in the graph below every bit compared to US dollar and Euro.
Graph demoing four different currencies motion during the twelvemonth 2005-2006
The information shows that the Indian currency depreciated in early July -August 2005 and so appreciated, this was chiefly because the growing in export. The depreciation of Indian currency was neutralised by the growing of export in the economic system. The Chinese currency depreciated because of the Asiatic fiscal crisis that took topographic point in Thailand which spread across the boundary line of other states. This has quickly led to crisp autumn in stock market and depreciation in local currency. Tse and Yip ( 2006 ) did a research to happen out whether the Asian fiscal crisis led to alterations in correlativity of involvement rates between the western states and the eastern states, the consequence showed that during the fiscal crisis there was a correlativity dislocation of involvement rates but it restored after the fiscal crisis. Fluctuation in currency besides reflects the manner the authoritiess are passing. If there is a shortage in the economic system, this will automatically coerce the currency to depreciation and as a consequence the economic system becomes weaker.
In this graph, Euro is the lone currency which has reached its extremum of 1.5070 against Pound and there was a drastic autumn the really following minute. There was a diminution of currency rate in early July 2005 because the cardinal bank was seeking to keep involvement rate and exchange rates at the same time which resulted in addition of money supply and the ultimate result was depreciation of the currency. However, Euro currency remained below 1.50 for the full twelvemonth and it ne’er rose above that figure. All three other currencies viz. INR, USD and RMB had a moving ridge motion which went up and down during the twelvemonth but it moved higher up than it originally started. This indicates that the British economic system is non at a really good state of affairs and that is why the monetary value of an exchange rate against the other currency is increasing taking to limited export and import. Whether this is traveling to be the same in the long tally, we will happen out in the following set of informations.
This tabular array show that the mean mean is comparatively higher than the old set of informations ( i.e. 2005 -2006 ) so is the lower limit and the maximal exchange rate for the twelvemonth 2006 to 2007. Further, we observe from the tabular array that the hazard on Indian Currency has gone down from 2.1642 to 1.9041 which means the authorities has taken some action on bettering the policy and scheme of cut downing the hazard, whereas for the other states the hazard has increased somewhat.
Graph demoing bespeaking currencies motion during the twelvemonth 2006-2007
Now let us look at the graphs which present an interesting motion. The Chinese RMB seems to be really stable ; the fluctuation is non that immense but it is demoing an upward tendency. Similarly, Euro besides shows an upward tendency but surprisingly the Indian Rupee is demoing a downward tendency and the US Dollar is demoing a steep lifting tendency. One of the possible grounds was the lodging bubbles crisis which started in 2005 but it became evident merely in early 2007. This has resulted in fiscal crisis which farther led to recession n the US economic system. These crises have an impact on other economic systems and it is still go oning to distribute across to other states. It non merely impact the Bankss but the people in the full economic system as they lose their occupations and the consumer have to cut down on their disbursals, so production become less and the importers reduced their goods that they used to import, all these made the market even more worse as a consequence the exchange rate goes down. Here, the rise in currency rate against Pound Sterling means that the economic system is non making good.
In comparing to the old set of informations, the mean exchange rate of US Dollar has gone up from 1.9210 ( 2006-2007 ) to 2.0049 ( 2007-2008 ) whereas the remainder of the currencies has gone down. The highest exchange rate for USD is 2.0947 followed by RMB which stood at 15.5665, Euro and Indian Rupee has gone down owing to improved economic system and the value of their are appreciating.
The below graph reflects the currency motion for the period 2007 to 2008, RMB shows a steep incline with a negative tendency so followed by Euro but it started to lift once more in mid 2007. In this period, the US and Indian economic system seems to be rickety, this is because of the subprime mortgage crisis that has resulted in the immense fluctuation of the currencies exchange rate. The Indian economic system is the most affected as the exchange rate surge to INR 84.6349 against Sterling doing things hard.
Graph bespeaking the currency motion for the twelvemonth 2007-2008
From the last set informations taken, the mean currency rate for USD has dropped down from 2.0049 to 1.6390 against Sterling, so is the other three currencies every bit good. Compared to the old twelvemonth informations, there has been immense alteration in the exchange rates. Let ‘s take a expression at the Indian currency rate ; the lowest value from the old information was INR 76.7981and now it ‘s INR 67.3335. The highest value of exchange rate for India was INR 85.7894 whereas for the old twelvemonth it was INR 84.6349. In this we observe that the standard divergence is the highest amongst all four sets of informations which indicates that the Indian currency has a really high hazard associated in the currency and the investors should be cognizant of it before trading.
Graph bespeaking the currency motion for the twelvemonth 2007-2008
No uncertainty that the graph for all four currencies is demoing a negative downward inclining tendency but from an importers perspective, if the rates are low they can import more goods by paying less otherwise they will incur a immense loss if they start importing goods when the monetary values are high. Hazard can be mitigated by come ining into a forward contact. So from the diagram, we can state that if the currency rates are low which mean it is favorable for the importer or business communities. But from investor ‘s position, they will ever put in the market which gives high return, so for them if the monetary value is high, they gain net income.
From all four sets of informations, the highest exchange rate for an Indian Rupee was INR 88.9596 in August 2006 and it has the highest hazard among all four currencies. However, from the given informations, it has been observed that hazard additions as currency rate decreased and when currency rate increases the hazard decreases. Euro currencies are less hazardous and are more stable. China besides carries high per centum of hazard as and when the monetary value of RMB falls. Therefore, it is really of import for investors to understand the market before puting. There are besides several other steps which can used for mensurating the hazard and the returns, nevertheless, in this paper we have used merely descriptive statistics to analyze the basic informations collected from DataStream.
Decision
History repeats itself ; whatever happens in the present is related to the yesteryear. The future monetary value motion is all based on the past monetary values and the person ‘s reaction in the market. Regulation besides plays an of import function in commanding the exchange rates. Sometimes, when the authorities does non command the involvements ‘ rate or exchange rate, it consequences in extra supply of money and this can do the value of the money to deprecate. Economic and fiscal crisis besides causes the money to deprecate. So if the economic system is sound so currency will be strong. In this paper, we have used the informations collected to see that how each currency behave over a period of clip utilizing the statistical tools. What we infer from the given informations is that all four currencies are traveling in a downward tendency which means that if I as an US investor will non put in the UK market if the monetary values are high since the intent of investing is have greater returns.
