Pir Mehr Ali Shah
University of Arid Agriculture Rawalpindi
The Relationship between Stock Prices and Exchange Rate,
Evidence from Pakistan
Usman Azhar 08-arid-1606
Abid Hussain 08-arid-1608
Faisal Shahzad 08-arid-1620
Usman Fazal 08-arid-1634
MBA Finance
University Institute of Management Sciences
Dedication
We would like to dedicate this accomplishment to our beloved and caring parents, and to our teachers with the support of whom we are standing at this step of our life stairs.
Acknowledgement
All gratitude and thanks to almighty “ALLAH” the Gracious, the most Merciful and Beneficent Who gave us courage to undertake and
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The relationship between these two macroeconomic variables i.e. stock prices and exchange rates has attracted the minds of economists since they both are very important determinants of the development of a country’s economy. Volatility in exchange rate is a major cause of macroeconomic ambiguity that affects firms. After the 1970’s, the High rise in international trade and implementation of floating exchange rate establishment by many countries led to increase exchange rate volatility. Pakistani currency Rupee was linked with the British Pound Sterling before 1970s. In 1971, Pakistan linked its currency to the U.S. Dollar due to apparent economic development of USA. During the past ten years, Pakistan's foreign exchange system has been moving towards a floated and market-oriented direction. Now, Pakistan is maintaining a floating exchange rate with government-managed to some extent. Firm’s exposure to exchange rate risk increased due to under these circumstances.
In the literature we identify three types of exposure under floating exchange rate system; economic, translation and transaction. Translation and transaction exposure are accounting based and explained in terms of the book values of assets and liabilities denominate in foreign currency value. Economic exposure is the sensitivity of company value to exchange rate fluctuation. At the corporate level, changes in
The exchange rates risk that is associated with economic, transaction, and translation exposure in Indian market. From the analysis, anticipate the fluctuations that seem to occur in the next 24 months
Boral Group has been exposed to changes in interest rate, foreign exchange rates and commodity prices from its activities. Transactions in foreign currencies must be translated at the foreign exchange rate ruling at the date of the transaction. (Boral Limited, 2010) According to the notes of Boral Limited, the sensitivity analysis is used in adjusting the interest rate and currency risks in order to prevent the changes arising from changes of the interest rate and the currency rate from making an impact on the consolidated earnings. For example, at 30
During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in
Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.
First and most of all we thank the Almighty Allah the most graceful and the most merciful. I
dollars, since shareholders want to have returns on U.S. currency. Several factors distinguished financial management by domestic firms from multinational corporations by different currency, and different economic and legal structures. It’s important to understand direct quotation, and indirect quotation which might affect the company’s overall revenue. Since, the currency of the dollar changes, it might require higher rates on foreign projects. We need to take into consideration political risk and exchange rate risk. Since, government actions can decrease the value of the investment. Or generate losses due to fluctuations in the value of the
Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.
Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk
Answer: To characterize the risk of a currency position, you must try to characterize the conditional distribution of the future exchange rate changes. With floating exchange rates, historical information provides useful information about this distribution. For example, you can use data to measure the average historical dispersion (standard deviation or volatility) of the distribution. The higher this volatility, the riskier are positions in this currency. It is also possible to rely on more forward-looking information using the options markets (see Chapter 20). Finally, we should point out that volatility
It is known that exchange rates float according to market conditions and that the appreciation or depreciation of a currency that we trade with my have an impact on the eventual revenue obtained so it is important for us to predict what the movements with the currency will look like.
The performance of a stock market is usually associated with the movements in the exchange rate because of its influence on the stock price of a firm. The foreign exchange market is a place where trading of international currencies occurs between many buyers and sellers around the world. Any fluctuations occur in the currency rate can influence the business activities between two different countries. For example, a strong home currency can leads to the firm’s profit when doing business in the country which have a weak currency rate.
The trend in exchange rates affect the amount of money a company pays to import and export products. Within the industry of playground equipment, the focus will be on imports due to the high volume of playground manufacturers being located outside of the United States. When the exchange rate fluctuates a company could spend less on exports, but more for imported products. With many of the manufacturers of playground equipment being foreign based, the exchange rate directly affects a company’s purchasing power. The exchange rate that will be focused on is the United States (Dollar) and Denmark (Danish Krone) due to one of the top competitors in the playground industry being located in Denmark. Figure X will show the fluctuations that can occur within a year. Firms in this industry will find that most of the products they produce or sell are affected by exchange rates since either the raw material for those products or the
Miller, K. D., & Reuer, J. J. (1998). Firm Strategy and Economic Exposure to Foreign Exchange Rate Movements. Journal of International Business Studies, 29(3), 493-513.
All praise is due to Allah, Lord of all the Worlds and Peace and Blessings upon his beloved Messenger, his family, his companions, and all those who follow in his righteous path until the Day of Judgment.
Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.