ASSIGNMENT

Assignment

Assignment

The currencies which I have taken is European Euro and U.S. Dollar, the whole project is to find the co-relation between the currencies of two different countries based on certain factors like GDP, BOP, inflation rates, interest rates, growth rate, employment rates and the current happenings of the two countries.

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is a risk-free profit.

In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value or convergence trades), as in merger arbitrage.

REASON: The U.S. is the largest and still the most important market in the world, the United States of America's economy is driven by consumers but is troubled by high debt levels. The United States of America (US or USA) has the world's largest economy. The other currency is European euro which has a high correlation with the dollar.

Company 1

?/$

Change

$/?

Change

$/ €

Change

6-Jul

95.03099

-2.38%

1.622781

-0.31%

1.393662

4.52%

7-Jul

95.10641

0.08%

1.615532

-0.45%

1.396361

0.19%

8-Jul

92.94724

-2.32%

1.602472

-0.81%

1.385155

-0.81%

9-Jul

92.83275

-0.12%

1.629827

1.68%

1.40254

1.24%

10-Jul

92.31969

-0.56%

1.618178

-0.72%

1.392461

-0.72%

The document contains the currency data of two countries. The economic conditions, including interest rates, inflation rates, growth rates, unemployment rates and etc. Political conditions, including upcoming elections, recent changes in political power and balance trade position are explained with a brief analysis.

In One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. For our purposes, we will use the PPP values. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.

Company 2

?/$

Change

$/?

Change

$/ €

Change

6-Jul

92.76246

-0.48%

1.61766

0.00%

1.397029

-0.33%

7-Jul

93.18444

142.20%

1.631332

0.84%

1.397001

0.00%

8-Jul

94.07321

188.88%

1.643634

0.75%

1.411397

1.02%

9-Jul

93.56397

49.08%

1.6414

-0.14%

1.411351

0.00%

10-Jul

94.09065

152.67%

1.63268

-0.53%

1.411801

0.03%

PPP states that currencies with high rates of inflation should devalue relative to currencies with low rates of inflation. PPP holds better in high inflation cases and the inflation rate of Europe is much higher than the inflation rate of United States. Here, in this case the predicted exchange rate is somewhat close to the real exchange rate because the price indices of the country cover tradable goods. The main reason we can say that PPP does not hold over the short-run because of the sticky good prices and changes in exchange rates in prices. PPP holds over the long run, it explains clear relationship between relative inflation rates and changes in ...