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If you are investing your money or you are doing international business, to forecast the exchange rate is very important to you because one side, you can get profit or loss due to changing the exchange rate and other side, you also manage your cash flow which will be affected due to this.

Meaning of Exchange Rate Forecasting

Exchange rate forecasting means to estimate the rate which will be any of future date. It is just expectation of currency rate. In future, our currency may be depreciated or may be appreciated. Whether our currency will be depreciated or will be appreciated, forecasting will be helpful for decreasing our risk because we will yield the resources in the present time for covering this future exchange rate risk.

Now, we are discussing main techniques and methods of Exchange Rate Forecasting

1st Technique : PPP

Triple PPP is the first technique. It means purchasing power parity. As per PPP, a country can not sell at the price less than other country because all the human beings are equal. God has made all on the basis of equality. But, there is corruption in any country, inflation will increase. So, when we compare two countries prices, one country whose prices will increase with higher rate, that country's currency will be depreciated. Other country's currency will automatically be appreciated. For example, in India, corruption is increasing with very high rate. Due to this inflation is also increasing faster rate. If we compare it with USA, our inflation rate is very high than USA. For example, in USA inflation is increasing with 1% and our inflation is increasing with 10%. So, due to this, our currency value will be depreciated with 9%

Depreciation of Indian Currency = 10% - 1%  = 9%

For example in past \$ 1 is Rs. 50.5 but due to this

(1 + 0.09) x (Rs. 50.5 per \$1) = Rs. 55.045 per \$1

So, rule is very clear as per PPP. If there will not any corruption in India, India will grow and our currency will be appreciated.

2nd Technique : REST

REST means relative economic strength technique. On this technique, expert can forecast the exchange rate. A country who is developing economically, will attract large number of Investor. More investor will invest their money in that country. With this, demand of currency will increase. When demand of currency will increase. That country's currency value in the world market will increase. So, there is better chance of appreciation of currency. When I say, economically developed or developing it means, it must be in real sense. Today is starting new trend to show elephant's outside teeth to  investors  by creating wikipedia profile  of strong economy of country. Everything is just only in Books. For example, all are saying, India is developing country. See the profile of India in Wikipedia and Go to Economy section. But, then why is our currency is so depreciated than other very small countries. As per REST, our currency should be strong than all country. Reason behind this is that our politicians are only smart to show in the books that we have spent crores of Rupees in the development of India but reality is that all are big cheaters.

With one example, I can prove this. I am working with a NGO and its name is student welfare council. We go to Govt. Schools and see the need of poor, needy and orphan students. We help them by providing free school dresses, shoes and books. Every year, we find such students in large number. We are happy to do this but our question is with the Govt. When all are saying that we are developing. We are providing full support. Then why are these students still needy. It is clear that before reaching the help to these needy children, there are lots of dogs (corrupt leaders) who consumed these children's money. Today is the coldest day of winter season. We are practical and we go to a village school. We have given the shoes and winter dresses to poor and needy students. We do not get donation for showing expenses in the books only. We spend our time to find needy and orphan and then we provide the support. If Indian Govt. will get example from our NGO, then there is no doubt, India's currency will strong within two days.

3rd Technique : TST

TST means time series technique. It is statistical method. As per this method, a forecaster can easily forecast the future exchange rate on past trend. For reducing the fluctuation, he can use also the moving average. After calculating this, we show it on the graph paper, with this, we can estimate the next exchange rate between two countries.

Important : {This written lecture is the part of CS Accounting Notes}

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Accounting Education: Exchange Rate Forecasting
Exchange Rate Forecasting