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Independent University,

Bangladesh

Course Name: International Financial


Management

Course ID: FIN 480

Sec: 01

Semester: Spring 2017

Submitted To: Dr. Kamrul Hasan

Date of Report Submission: 28/03/2017

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Analysis of Currency Forecasting
Bangladesh (2017-2027)

Submitted To: Dr. Kamrul Hasan

Lecturer- Independent University of Business School

Independent University

Submitted By:

Name ID

SYED WAFI HAIDER 1310897

Md. SHIFATULLAH 1310658

SARAH HUSSAIN 1230481

ABU SADAT MD. SAYEM 1311069

RUBAYDA AFREEN 1230214

NIDA MOHAMMAD PINKI 1310523

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Letter of Transmittal

March 28, 2017


Dr. Kamrul Hasan
Instructor,
School of Business,
Independent University, Bangladesh.

Subject: Analysis of currency forecasting for Bangladesh.

Dear Sir,
We are pleased to submit our set topic analysis of currency forecasting for
Bangladesh.
Moreover, we will be pleased to clarify and answer any questions regarding
possible discrepancies or inconsistencies that may have presented itself in the
paper.

Thanking you.
Yours sincerely,

Name ID

SYED WAFI HAIDER 1310897

Md. SHIFATULLAH 1310658

SARAH HUSSAIN 1230481

ABU SADAT MD. SAYEM 1311069

RUBAYDA AFREEN 1230214

NIDA MOHAMMAD PINKI 1310523

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ACKNOWLEDGEMENT

At first, we express our deep gratefulness to the almighty Allah for giving us
assistance in the way of life. A large number of people contributed significantly to
making this report possible.
The special thank goes to our helpful Faculty and my group members. The
supervision and support that they gave truly help the progression and smoothness
of the report. The co-operation is much indeed appreciated. A lot of effort and
study have been put in to make this report a reality. This would not have been
possible without the genuine support and assistance provided by the people whom
we approached during the various stages of preparing this report.

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EXECUTIVE SUMMARY

This report aims at developing an exchange rate forecasting technique using


Market base in order to predict the exchange rate of Bangladeshi Taka against US
Dollar, at a future point in time.
Current month interest date of two countries have been collected and noted down.
Bangladesh Bank Website and other articles have been used as source for data
collection. The data have been used in manually in order to construct an interest
rate parity equation.
The Interest rate parity equation has been used to forecast future forward exchange
rate.
Finally the yearly forecasted forward rate of has been used to determine what will
be the investment decision of Bangladesh speculator and what will be their profit
or loss. The percentage change is noted down and finally a conclusion is given.

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Introduction

Exchange rate between two currencies is the rate at which one currency is exchanged for another.
It is the amount of foreign currency that one unit of domestic currency can purchase. It is also
regarded as the value of one countrys currency in terms of another currency. Depreciation
means weakening of a currency, or in other words, it is able to buy lesser foreign currency, per
unit of domestic currency than it could before. Appreciation means strengthening of a currency,
or in other words, it is able to buy more foreign currency per unit of domestic currency than
before.
Exchange rates are determined in the foreign exchange rate, which is open to a wide range of
different types of buyers and sellers. Currencys exchange rates may be floating or they may be
pegged to another currency. A floating exchange rate is dependent on the supply and demand of
the involved currencies and also as the amount of the currency held in foreign reserves. A
government may peg its currency to a certain amount in another currency.

Methodology:

The study is purely based on secondary data collection. We collected the information from
Bangladesh Bank website. As the study required a diversification of data so we searched various
websites, journals and articles of different authors. We took spot rate, lending rate and borrowing
rate and then forecasted that whether the value will appreciate or depreciate in March 2017-2027.

1) We choose USD Currency against Bangladesh Currency for our quarterly and yearly forward
rate and speculation analysis.

2) Spot Rate: The Spot rate of Bangladesh is Taka 78.74159 BDT/ USD ( 30 December, 2016)

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APPROACHES TO FORECASTING EXCHANGE RATES

A forecast represents an expectation about a future value or values of a variable. The expectation
is constructed using an information set selected by the forecaster. Based on the information set
used by the forecaster, there are three pure approaches to forecasting foreign exchange rates:

(1) The Efficient Market Approach.


(2) The Technical Approach.
(3) The Fundamental Approach.

Market Based Forecasting Techniques:


e = [1+INT (n)] / [1+INT (f)] -1

Explanation of the Different Terms of Equation:


INT (n) Interest rate of home currency
INT (f) Interest rate of foreign currency
Annual Interest Rate of Home currency 6.75% (Deposit Rate)

The benchmark interest rate in Bangladesh was last recorded at 6.75 percent. Interest Rate in
Bangladesh averaged 7.20 percent from 2008 until 2016, reaching an all time high of 8.75
percent in September of 2008 and a record low of 4.50 percent in October of 2009.

Annual Interest Rate of Foreign currency 0.75%

The Federal Reserve kept the target range for its federal funds steady at 0.5 percent to 0.75
percent during its February 2017 meeting, in line with market expectations and following a
25bps hike in December. Policymakers noted the improvement in business and consumer
confidence and the rise in consumer prices and said near-term risks to the economic outlook
appear roughly balanced. Interest Rate in the United States averaged 5.81 percent from 1971
until 2017, reaching an all time high of 20 percent in March of 1980 and a record low of 0.25
percent in December of 2008.

Quarterly Interest Rate of Home currency- (0.0675/12)*3 = 0.016875

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Quarterly Interest Rate of Foreign currency (0.0075/12)*3=0.000625
e = [1+INT (n)] / [1+INT (f)] -1
= [1+ 0.016875] / [1+0. 0.000625] 1
= 0.01623985

Annual Interest Rate


e = [1+INT (n)] / [1+INT (f)] -1
= [1+ 0.0675] / [1+0.0075 1
= 0.059553349

Equation of Forward Rate:


F= S (1+P)
Explanation of the Different Terms of Equation:
F= Forward Rate
S= Spot Rate

1st Year (January 2017 to December 2017) - Spot Rate= Taka 78.74159 BDT/ USD
F = 78.74159 (1+0.059553349)
= Taka 83.43080943 / USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2017 is going to be Taka 83.43080943 / USD. The exchange rate in
December 2016 was 78.74159 BDT/ USD. Now more Taka is required to purchase a USD. Hence
according to our forecast, we can conclude that the Taka will depreciate in December 2017.

2nd Year (January 2018 to December 2018) - Spot Rate= Taka 83.43080943 / USD
F = 83.43080943 (1+0.059553349)
= Taka 88.39939354 / USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2018 is going to be 88.39939354 / USD .The exchange rate in December
2017 was Taka 83.43080943 / USD. Now more Taka is required to purchase a USD. Hence
according to our forecast, we can conclude that the Taka will depreciate in December 2018.

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3nd Year (January 2019 to December 2019) - Spot Rate= Taka 88.39939354 / USD
F = 88.39939354 (1+0.059553349)
= Taka 93.66387545 / USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2019 is going to be Taka 93.66387545 / USD. The exchange rate in
December 2018 was Taka 88.39939354 / USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2019.

4th Year (January 2020 to December 2020) - Spot Rate= Taka 93.66387545 / USD
F = 93.66387545 (1+0.059553349)
= Taka 99.24187291 / USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2020 is going to be Taka 99.24187291 / USD. The exchange rate in
December 2019 was Taka 93.66387545 / USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2020.

5h Year (January 2021 to December 2021) - Spot Rate= Taka 99.24187291 / USD
F = 99.24187291 (1+0.059553349)
= Taka 105.1520588/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2021 is going to be Taka 105.1520588/ USD. The exchange rate in
December 2020 was Taka 99.24187291 / USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2021.

6h Year (January 2022 to December 2022) - Spot Rate= Taka 105.1520588/ USD
F = 105.1520588 (1+0.059553349)
= Taka 111.4142161/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2022 is going to be Taka 111.4142161/ USD. The exchange rate in
December 2021 was Taka 105.1520588/ USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2022.

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7th Year (January 2023 to December 2023) - Spot Rate= 111.4142161/ USD
F = 111.4142161 (1+0.059553349)
= Taka 118.0493058/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2023 is going to be Taka 118.0493058/ USD. The exchange rate in
December 2022 was Taka 111.4142161/ USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2023.

8th Year (January 2024 to December 2024) - Spot Rate= 118.0493058/ USD
F = 118.0493058 (1+0.059553349)
= Taka 125.0795373/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2024 is going to be Taka 125.0795373/ USD. The exchange rate in
December 2023 was Taka 118.0493058/ USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2024.

9th Year (January 2025 to December 2025) - Spot Rate= 125.0795373/ USD
F = 125.0795373 (1+0.059553349)
= Taka 132.5284426/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2025 is going to be Taka 132.5284426/ USD. The exchange rate in
December 2024 was Taka 125.0795373/ USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2025.

10th Year (January 2026 to December 2026) - Spot Rate= 132.5284426/ USD
F = 132.5284426 (1+0.059553349)
= Taka 140.4209552/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2026 is going to be Taka 140.4209552/ USD. The exchange rate in
December 2025 was Taka 132.5284426/ USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2026.

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11th Year (January 2027 to December 2027) - Spot Rate= Taka 140.4209552/ USD
F = 140.4209552 (1+0.059553349)
= Taka 148.783493351939/ USD

From our computation of exchange rate using Market base analysis, we have forecasted that the
exchange rate in December 2027 is going to be Taka 148.783493351939/ USD. The exchange rate in
December 2026 was Taka 140.4209552 / USD. Now more Taka is required to purchase a USD.
Hence according to our forecast, we can conclude that the Taka will depreciate in December 2026.

Explanation of relationship between Exchange rate and stock market:


According to our future forward rate forecasting we can see that Bangladesh currency will be
depreciated. A depreciation of the nominal exchange rate creates expectations of inflation for the
future. Inflation is seen as negative news by the stock market, because it tends to curb consumer
spending and therefore company earnings.
American investors will be unwilling to hold assets in currency that depreciates as that would
erode the return on their investment. In a case of TAKA depreciation, investors will refrain from
holding assets in the Bangladesh, including stocks. If American investors sell their holdings of
Bangladesh stocks, share prices ought to drop.
Last, on a macroeconomic level, a depreciated TAKA will boost the export industry and depress
the import industry. The impact on domestic output will be positive. Increasing output is seen as
an indicator of a booming economy by investors and tends to boost share prices.

Exchange rate impact on Lending and borrowing:


In our forward rate forecasting we can see that the value of TAKA will be depreciated against
USD. As we know our currency will be depreciated in near future so the United State of America
Financial institution may borrow our currency now and convert it to their local currency now
before the currencys value declines to its proper level. They would hope to repay the loan in
Bangladeshi currency after the currency depreciates, so that they would be able to buy TAKA for
a lower price than the price at which they initially converted TAKA to USD which is their own
currency.
In Bangladesh investors perspective the investor should invest the fund in foreign financial
market because the foreign currency (USD) is strong position in right now, when our currency

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(TAKA) will be depreciated in that time foreign currency (USD) will be appreciated. In the
conversion time the Bangladesh investors will receive more amount of return.

Conclusion

From our forward rate calculation and speculation we can see that when spot rate 78.74159 BDT/
USD ( 30 December, 2016) and forward rate Taka 83.43080943 / USD the speculator will make
profit but when the Bangladesh speculator has to pay more TAKA to buy one USD in that case
they will face loss in upcoming year.

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Reference

https://www.poundsterlinglive.com/best-exchange-rates/us-dollar-to-bangladesh-taka-exchange-rate-
on-2017-03-12

http://www.tradingeconomics.com/bangladesh/deposit-interest-rate

http://www.tradingeconomics.com/united-states/interest-rate

http://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=BDT

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