Projecting Foreign Currency Values

Paper Summary:

Discussion of models to forecast currency exchange rates in the futures market. Reviews three major models: Purchasing power parity (PPPM), account balance (CABM), portofolio balance (PFBM). Two newer models: random walk (RWM), Fischer effect (IFEM). The hypothesis and appeal of each model. Theoretical validity of the models. Usefulness as tools for monetary management.

From the Paper:

"PROJECTING FOREIGN CURRENCY VALUES

Introduction
Participants in foreign exchange markets also deal for future values. Such dealing composes the forward markets or futures markets for currencies (Lu, 1997). Active forward markets exist for a few heavily traded currencies and for several time intervals corresponding to actively dealt maturities in the money market.

Risk management has been the traditional role of the futures markets. Traders, as an example, use currency futures to protect (hedge) themselves against fluctuations in exchange rates that may be detrimental to their profit margins. A United States trader who needs foreign currency for a business transaction in six months could sell a futures foreign currency contract for ..."

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