Study of Performance & Correlation of EURUSD With The Cross Currency Pairs of Euro

Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro
A REPORT ON:
Undertaken in
Harvest Futures Consultants India Pvt. Ltd

Submitted By:
Suneesh L B5-29 PGDM BIFAAS
Faculty Guide: Mr. LohithKumar B Assistant Professor Finance
Corporate Guide: Mr. Anil Kumar Sambhana Portfolio Manager HFC Pvt. Ltd
ACKNOWLEDGEMENT
I am fortunate to have an opportunity to undergo the Summer Internship at Harvest Futures Consultants India Pvt. Ltd. The training has been useful for me in understanding the various pragmatic aspect of the management function in practice in the real world. A work is never the work of individual. It is a combination of ideas, suggestion and contribution of supporting people. This project report is the result of collective efforts made by me, my corporate guide and my faculty guide who give me their full support and valuable time. First of all I express my sincere thanks to my Faculty guide Asst.Prof. Lohit Kumar, Siva Sivani Institute of Management, Secunderabad, who always guided and motivated me. The completion of the project was impossible without my corporate guide Mr. Jyoti Goyal, Asst. Portfolio Manager and Mr. Anil Kumar, Portfolio Manager, Harvest Futures who gave me an opportunity to work in a new circumstance. Under their guidance I completed my summer internship in Harvest Futures Consultants India Pvt. Ltd. By working under these experienced persons I got an opportunity to learn and take advantage of knowing things in a better way with complete understanding the project. At last I would also like to thanks the messengers working in Harvest Futures Consultants India Pvt. Ltd, who supported me and showed a positive response in the live project and shared their Knowledge and Information. Suneesh L
CERTIFICATE
This is to certify that Mr.Suneesh l is a student of Siva Sivani Institute of Management. He has undergone his Summer Internship Programme in Harvest Futures Consultants India Private Limited from 9th April 2012 to 28th May 2012. He worked on the topic of Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro and completed the project successfully under my supervision and guidance. I wish him all success.
Date: Place:
Project Guide LohithKumar B

(Assistant Professor Finance)
DECLARATION
I hereby declare that this work entitled TOPIC TITLE for Harvest Futures Consultants India Pvt. Ltd. is my work carried out under the guidance of my faculty guide, Asst. Prof. Lohith Kumar and my corporate guide Ms. Jyoti Goyal, Asst. Portfolio Manager and Mr. Anil Kumar, Portfolio Manager, Harvest Futures Consultants India Pvt. Ltd. for the partial fulfilment of the requirements for the award of my Post Graduate Diploma in Management.
Place: SECUNDERABAD Date:
Signature: (Suneesh L)
ACKNOWLEDGEMENT
I am thankful to my guide Asst. Professor LohithKumar B for the valuable advice and timely assistance during the course of this project work. It gives immense pleasure to place on record my sincere thanks and sense of gratitude to Dr. K. Sasi Kumar for his valuable encouragement and kindly co-operation for the accomplishment of the study I also express my heart-felt gratitude to my corporate guide Mr. Anil Kumar Sambhana, Portfolio Manager, Harvest Futures Consultants India Private Limited, Hyderabad, for her support and timely advice. I express my thanks to all my teachers, friends, and classmates for their support and encouragement. I express my love and gratitude to my beloved parents and my sister for their support and kindness for accomplishing this project. Finally, I bow my head before god almighty who bless me with enough physical and mental strength for the successful completion of this project.
Suneesh l
LIST OF CONTENTS
Executive Summary Chapter 1 Introduction Chapter 2 Industry & Company Profile Chapter 3 Theoretical Aspects of the Study Chapter 4 Research Methodology Chapter 5 Data Analysis & Interpretation Chapter 6 Findings & Conclusion Chapter 7 Suggestions Bibliography & References
EXECUTIVE SUMMARY
The study of Correlation of Cross currencies of Euro with EURUSD is taken up as an Industrial Internship Program (IIP) in Harvest Futures Consultants India Pvt. Ltd. This study is mainly focused on the currency pairs valuation of Euro. This study is undertaken based on various technical tools like Simple Moving Average, Weighted Moving Average, Exponential Moving Average, Correlation, and GARCH Model. The objective of the study is mainly focused on gaining knowledge about the forex market as well as getting a better idea and comprehensive details of Eurozone and Euro and to measure the change in value of the other currencies with respect to change in the value of Euro. The project gave a great learning experience and at the same time it gave enough scope to implement my analytical ability. The analysis and advice presented in this Project Report is based on the research of Eurozone and its currency. This report will help you know about the relation between the different currency pairs of Euro.
CHAPTER 1 INTRODUCTION
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro INTRODUCTION Exchange rate of a countrys currency pair depends upon the performance of the economies of the base currency as well as the quote currency along with the perception of the people linked to the buying and selling of that particular currency pair. So, these exchange rates keep on fluctuating based the changes in these factors. It is quite possible that the effect of these factors on one currency pair can have an impact on some other currency pair. Reasons for this can be dependency of countries on each other or the pairs must be having one common currency which will impact both the currency pairs. Now the question arises is whether it has a positive impact or negative impact and how strong the impact is. To have a better understanding regarding this I have tried to compare EURUSD with all the cross currency pairs of Euro. This research article will try to analyse the relationship between these currency pairs. SCOPE OF STUDY o The scope of the study is to find the extent to which the price of Euro and other currencies have fluctuated from the last decade. o To know how much variation has happened in the last decade in the value of EUR. o To know whether the changes made by European Central Banks in their monetary policy has a positive effect on the currency value or not. o To know whether the change in the value of EUR lead to a positive or negative change in other currencies. SIGNIFICANCE OF THE STUDY o To know the effect of Economic changes happened in Euro on the Currency Value of different pairs of Euro. OBJECTIVES OF THE STUDY MAIN OBJECTIVE This project attempts to study the intricacies of the foreign exchange market. The main purpose of the study is to get a better idea and comprehensive details of Eurozone and
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Euro and to measure the change in value of the other currencies with respect to change in the value of Euro. SUB OBJECTIVE o To know about the different changes made by the European Central Bank in its monetary policy to stabilise the Eurozone Economy. o To know about the various concept and technicalities in foreign exchange. o To know various functions of forex market. o To know the knowledge of hedging tools in foreign exchange. o To know the effect of different economic factors on the currency value. LIMITATIONS OF THE STUDY o Time Constraints o Resource Constraints: Data collected is mostly secondary data. Collection of primary data was limited to an extent. DATA COLLECTION o Primary data was collected through our companys forex trading platform, Meta Trader 4 (MT4) o Secondary data was collected from newspapers, books, other publications and internet. DATA ANALYSIS Data analysis was done using different concepts of Statistics and Financial Accounting.
LITERATURE REVIEW In this phase, I have read a few articles relating to the foreign exchange and correlation of currencies which could have helped me in completing my report.
Article 1 TOPIC: Exchange rate volatility and volatility asymmetries: an application to finding a natural dollar currency. AUTHOR: Kian Teng Kwek & Kuan Nee Koay SOURCE: Applied Economics; Feb2006 VOLUME: 38, ISSUE: 3 ABSTRACT: Based on six daily spot nominal exchange rate returns denominated in the US dollar, viz--viz UK Pound, Japanese Yen, Swiss Franc, Canadian dollar, Australian dollar and Singapore dollar, this paper tries to find a natural Dollar currency by comparing the linear/nonlinear dynamics in the conditional variance of these bilateral exchange rate returns (time varying volatility vs. asymmetries).The characteristics of the unconditional distribution of the FX returns justified the use of the GARCH class of models of conditional volatility. Strong time varying symmetric effects are apparent in all the series examined, especially in the Australian dollar. Further asymmetric effects in unexpected appreciations and depreciations of currencies are examined based on the GJR model, the ST GARCH model and the ANST-GARCH model (which encompasses several asymmetric models). The estimates of asymmetric models show weak evidence of asymmetries in most of the currencies, except in the Japanese Yen and UK Pound. Further findings show that the Japanese Yen is a non-natural Dollar country. However, there may possibly exist some mild deterministic asymmetric effect in the UK Pound. Based on the symmetric GARCH model, a trader/investor may consider Australian dollar as the relatively most likable currency, i.e. relatively the least volatile currency and relatively the most synchronized with the US dollar
Article 2
TOPIC: Currencies and correlations. AUTHOR: Cofnas, Abe SOURCE: Futures: News, Analysis & Strategies for Futures, Options & Derivatives Traders; Jun 2012 VOLUME: 41, ISSUE: 6 ABSTRACT: The article presents an analysis of shifts in inter-market correlations in 2012. It mentions the positive correlations between crude oil and Canadian dollar and copper and Australian dollar and the negative correlations between gold and Standard & Poor's Corp. (S&P) 500 index. It indicates that market movements are strongly driven by the currency-commodity connection.
Article 3
TOPIC: Global Interest Rates, Currency Returns, and the Real Value of the Dollar AUTHOR: Engel, Charles & West, Kenneth D SOURCE: American Economic Review; May2010 VOLUME: 100, ISSUE: 2 ABSTRACT: The article presents an overview of the impact that the global financial crisis of 20082009, global interest rates, global exchange rates, risk premiums and currency returns have had on the real value of the U.S. dollar. A comparison of the real value of the U.S.
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro dollar and the real value of the Euro, the Canadian dollar, the Swiss franc and the Japanese yen between October of 1979 and July of 2007, is presented. Factors which led to an appreciation of or a devaluation of the dollar between 2007 and 2009 are examined.
CHAPTER 2 INDUSTRY AND COMPANY PROFILE
INDUSTRY PROFILE Foreign Exchange Market HISTORY After the end of the World War II, the whole world started experiencing chaos due to extensive currency volatility. So, the governments of all the countries started realising the need of a system to stabilise the global economy. So, the Bretton Woods system was introduced in the year 1946. As per this system the exchange rates of all currencies were set against the Gold. Soon enough, In 1971 Bretton Woodss system was abolished and a new system The Flexible Exchange Regime was introduced in 1973 with United States in the pilot seat. After implementation of this system, the currency market evolved into a Free Floating system, where exchangerate of currencies is determined on the basis of demand and supply. In the beginning it was difficult to determine a fair exchange rate, but due to advancement in technology now its very much possible. Even now the same currency exchange rate system is followed. WHY FOREX WAS NEEDED? The volume of the international transactions has increased drastically in the last 50 years. Exports of goods and services from United States now total more than 10% gross domestic product (GDP). Imports are also of the same size. For Austria and Germany this figure exceeds 45% and for Greece and Italy its more than 20%. Similarly annual capital cash flows involving billions of dollars occur between the United States and other nations. International trade and investment of this magnitude would not be possible without the ability to buy and sell foreign currencies. This buying and selling of currencies takes place in the market called Foreign Exchange Market also called as Forex. ABOUT FOREX MARKET Foreign Exchange market is a marketplace where currencies of different countries are bought and sold. Itis the largest financial market in world. It has a ginormous trading volume of $4 Trillion a day as compared to the measly $74 billion a day volume of New
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro York Stock Exchange.
Forex Market is a new concept in India. But in recent years it has gained tremendous popularity. It is unique for its large volume of trading per day. FEAURES o No Physical location or a central exchange. o Considered OTC (Over the Counter) or Interbank. o Entire market runs electronically within a network of Banks, continuously over a 24 hour period. o Majors comprise 75% of all trades. o USD is one half of the majors. o Trades of Majors in the whole Forex trade: USD-84.9% EUR-39.1% JPY-19.0% o USD comprises of 62% of worlds official foreign exchange reserves.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o USD plays a Central role in Forex.
WAYS TO TRADE IN FOREX o Spot MarketCurrencies are traded immediately or on spot date.
Accounts can be opened with just 25$ Simplicity, Liquidity and tight spreads, round the clock operations. o Futures MarketCurrencies are traded (bought or sold) at a specified timeprice on a futures date. Created by: Chicago Mercantile Exchange (CME) on 1972 o Options MarketFinancial instruments that gives the buyer an Option, but not an obligation to buy or sell an asset at a specified price on the options expiration date. o Exchange Traded FundsIt is a set of stocks combined with some currencies allowing the trader to diversify risk. This is all about the forex market. But now the question arises is Why to trade in Forex market and not in Stock market? What makes it better? The answer for this is: Forex: o Is a 24 hour market o Has Minimal or no commission o Instantly executes the market orders o Supports Short selling without an uptick o Has No Middlemen o Buying/Selling program of an individual entity do not control the market o Analysis and brokerage the market firms are less likely to influence the market o Has a high Liquidity o Has Minimum or No Commission o Has Price Certainty o Has Guaranteed limited risk
FOREX MARKET STRUCTURE

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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Unlike trading in the stock market, you dont need to go through a centralized exchange like the National Stock Exchange (NSE) with just one price.
o At any time there are multiple prices for a currency from different currency dealers in the forex market. The market is so huge and the competition is so fierce that you can get the lowest prices whenever you want. The forex market is considered an Over the Counter (OTC), or Interbank market due to the fact that entire market is run electronically, within a network of banks, continuously over a 24-hour period. MAJOR PLAYERS Previously only big players were available to trade. But now because of internet, online forex trading firms are now able to offer trading accounts to retail traders. The major participants of the foreign exchange market are: o Super BanksLargest banks that determines exchange rates based on demand and supply. For Exp. UBS, Barclays Capital, Citigroup etc.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o Large Commercial CompaniesCompanies which get into foreign trade go to commercial banks as volume of the trade is not as big as volume of the trade is not as big for the Interbank Market. For Exp. As Indian companies buying or selling something from or to other countries. o Government and Central Banks Government: Participate for their operations, international trade payments & Government handling foreign exchange reserves. Central Banks: Affects forex market when they adjust interest rates to control inflation doing this they currency valuation. o The SpeculatorsSpeculators are individuals or institutions who make very risky investments based on his analysis, anticipating a positive or negative currency value in future. Some differentiate investors and speculators based on the riskiness of the investment they make. Speculators make close to 90% of the trade volume. The participants in the Forex market can have a hierarchy as follows:
At the top of the ladder is the Interbank market. It is composed of largest banks of the
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro world and some smaller banks. The traders trade in this market through Electronic Brokering Services (EBS) or using Reuters Dealing 3000-Spot Matching.
COMPANY PROFILE Harvest Futures Consultants India Pvt. Ltd. Harvest was founded to provide the best possible Forex, Metal, Indices and Stock trading experience for the online trader. Harvest is backed by a large financial Harvest Group with over $16 billion in assets under management. HARVEST INTERNATIONAL FUTURES (HARVEST) is a limited liability company engaged in financial services, particularly in futures trading. As a Broker, HARVEST founded by and based on Law No. 32/1997 on the Commodities Futures Trading and Government Regulation (PP) No. 9/1999 on Implementation of the Commodity Futures Trading. Other provisions are the basis for the establishment of HARVEST is Presidential Decree No. 12/1999 on Commodities Subject to cite this as the Commodity Futures, and various other technical regulations in the Decree of the Head of the Commodity Futures Trading Supervisory Agency (BAPPEBTI) starting from No. 1 to 19 that regulates the technically procedures and institutional trading in the Commodity Futures Exchange. PT HARVEST INTERNATIONAL FUTURES domiciled and headquartered in Jakarta. Articles of Association contained in Deed No. 38, dated February 16, 2004, and made before a notary Marina Soewana, SH Gunung Sahari in Central Jakarta. As a Broker, the Company has been registered as a member of PT Jakarta Futures Exchange (BBJ), a member of PT Indonesian Derivatives Clearing House (Limited), and the subject under the auspices of the Commodity Futures Trading Supervisory Agency (BAPPEBTI). As we know, other futures brokerage firms have been preoccupied with financial contracts such as forex and index through the Alternative Trading System (SPA). It is characterized by the data, the contribution of commodity products is still below 1% compared to total transactions in the Jakarta Futures Exchange (BBJ). Instead, HARVEST want to be a pioneer for the stakeholders Futures Trading, commodity contracts that are also feasible and well turned profitable. Moreover, the Act
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro No.32/1997 clearly bearing the 'label' as the Commodity Futures Trading Act in which the undertaking to develop the commodities produced by farmers of Indonesia.
VISION OF Harvest International Futures Such rapid economic growth along with the era of free trade makes society face many choices in investing. Investing has become a major need in the community. Recognizing the need for investment, especially in commodity futures trading instruments, the PT Harvest International Futures is present and always try our best to meet those needs as well trying to be a leading and credible broker in Indonesia.
MISSION OF Harvest International Futures o Provide the best solutions for its customers in meeting the needs of investment in futures trading is safe, profitable, comprehensive, convenient, and credible o Assist authorities in educating the public about Futures Trading in order to have a complete understanding, complete, and correct, so that people can take the maximum benefit o Play an active role together all stakeholders in creating an organized Futures Trading, fair, efficient, effective, transparent and reliable in an atmosphere of healthy competition and fair.
INVESTMENT PRODUCTS To describe each and every investment product is an almost impossible thing. Humans are creative species, if something is not doing too well, they either modify it or create something else. Its the same with investment products. We are going to see only the general overview of each group of products based on their capital outlay and projected returns.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o Time Deposits This is the most basic form of investment. In general, the public has the notion that time deposits are the most secure form of investments. The interest yield is slightly above the prime rate and there a few choice of time frame, from 3 months to 12 months. Capital outlay is not large but the drawback is that? Withdrawal prior maturity will set you back with penalty rates. Be very sure that you do not need to use the money for that period. o Investment Products (Financials) An investment can come in many forms. Investments can come in various forms; some people are comfortable in property or real estate, some may be interested in building business and some may prefer to invest in people. The products that we are going to dwell here are investments in the financial industry. o Shares, stocks, equities The most common of all investments. Basically, by purchasing shares of a company, you actually own a certain percentage of that company. Your returns may come in two forms. First, you'll be rewarded with dividends annually, when That Company makes some profit. That if company fails to make-profits, then you will not be rewarded with dividends but you still own the shares. The second way of getting returns is when the share price increases. Let's say, you bought 500 shares of company XZY at price of $ 1.00 per share. Later the price goes up to $ 1.20 per share. Your profit will be ($ 0.20x500 = $ 100.00) when you sell you shares. Your risks will are the stability of the company. If the company fails to make-profit, you do not get the dividend. When the company performs badly, the share price goes down, so will be your shares value. o Bonds, fixed-income securities These are slightly less risky, but also less returns. Basically Bonds are a loan made to an institution with a promised payback of a certain percent after a fixed period of time. The payback is also known as yield and yields are only slightly more than fixed deposits. Usually sovereign institutions offer bonds with maturity ranging from 10-30 years. Not too long ago, some Governments issue a shorter period, 5 years, these are known as junk bonds. History has taught us that only Governments have the ability to issue bonds and the private sector can only issue fixed-income securities. So, presently, only
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro private financial institutions with deep pockets can offer fixed-income securities. o Mutual Funds Slightly better returns than shares and bonds, but with slightly less risk. Mutual funds are managed by fund managers, usually institutions like finance houses, banks and even insurance companies. The fund managers will offer a certain fund to the general public with a proposed yield, through a prospectus. The prospectus will provide information on where the money will be invested, so the risk is spread among a broader spectrum and the past performance of that funds. The funny thing is, if you can read the fine print, it will usually say something similar to this: "The past performance may not be the same as the future performance." o Futures The first three products are passive investment basically, meaning, after you invest (putting in your money) you simply wait and pray that you will reap rewards investment over time. Futures are totally different; its active investment. If you do not have the time, then find yourself a broker can trade your futures WHO account. The most beautiful aspect about futures trading is; 2-way opportunity. Profits can be made either Airways, i.e. when the price is climbing up, or when the price is sliding down. Please see our section on Futures Trading.
HARVEST WHY? In accordance with our vision and mission, PT HARVEST INTERNATIONAL FUTURES will always assist you in trading in futures trading. Why do we deserve to be your partner in the deal? These are some of our advantages compared to other similar companies: 1. Reliable Broker We believe that a future trading is an alternative transaction that may not be suitable for everyone. Its characteristics are high risk or high leverage, demanding customers who engage in it have the ability of trading adequately. With human resources professionals in his field and integrity, supported by cutting edge technology, PT HARVEST
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro INTERNATIONAL FUTURES will be a partner you are reliable. 2. Dedication to the Commodity Products (Non-financial products) PT HARVEST INTERNATIONAL FUTURES want to show as well as a pioneer for stakeholders on Futures Trading, commodity contracts that are also feasible and well turned profitable. Moreover, the Act No.32/1997 clearly referred to as the Commodity Futures Trading Act in which the undertaking to develop the commodities produced by farmers of Indonesia. Based on this fact, it is a kind of irony for the country, when the market has yet to have organized (exchange) is the reference commodity or benchmark of world commodity trade. The international community is to make London as the center of the transaction and the reference price of coffee and cocoa, and Kuala Lumpur for rubber and palm oil. Determination to push Indonesia into the world's commodity exchanges that influence and motivate top management to dedicate PT HARVEST INTERNATIONAL FUTURES contracts in commodities as a product principal in the transaction. 3. Market transactions in a 24 Hour Active Transactions, services, and facilities of our transactions can be accessed for 24 hours. Access can be done conventionally by phone (Dealing Quote / DQ) and transactions online through a personal computer (PC), laptop connected to the Internet network by using the platform Harvest Trader 4. Platform transactions that are used can also be accessed via personal digital assistant (PDA). 4. High Transparency and Liquidity As a partner you in the transaction, we do so in a transparent and fair. Customers' financial reports are sent periodically sent by fax or courier and by e-mail to customers who use the Online Trading Account. 5. Spread and Competitive Price PT HARVEST INTERNATIONAL FUTURES has a direct relationship to the center of world commodity and financial markets of the world that gives us advantages in terms of price. Thus we are able to give the price difference (spread) are more competitive. 6. Qualified Transaction Platform
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Our trading platform using Harvest Trader System of MetaQuotes Software Corp. With platforms such transactions, customers can easily access and execute directly against the position in the market. 7. Research and Development Division of Research and Development of our support for 24 hours in terms of providing market information and analysis of customer needs. We also provide the latest information via email, sms, phone, and mailing list. 8. Education and Training Products In order to enhance a comprehensive understanding of the futures market and the skills of trading clients, PT HARVEST INTERNATIONAL FUTURES continuously and sustainably provide free training. Training was held at headquarters and in each of our branches. 9. Information Technology Our customer is a very valuable partner. Therefore continue our solidarity and assistance to do. Information technology support is provided to assist customers when experiencing difficulties in accessing or using our trading platform. 10. Separate Account Last but not least, the security of customer funds is our top priority. Therefore, customer funds are placed in the Separate Account (segregate accounts) on the approved Depositary Bank BAPPEBTI. Laws and other provisions to ensure the security of the underlying funds that are stored in this account. Accounts are available in USD and Euro.
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CHAPTER 3 THEORITICAL ASPECTS OF THE STUDY
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ABOUT EURO EURO is the official currency of the Eurozone, which consists of 17 of the 27 member states of the European Union (EU). It is also the currency used by the Intuitions of European Union. The Euro came into existence on 1 January 1999, although it had been a goal of the European Union and its predecessors since 1960s. The Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in further five European countries and consequently used daily by some 332 million Europeans. Additionally over 175 million people worldwideincluding 150 million people in Africa use currencies which are pegged to the Euro. The Euro is the second largest reserve currency as well as second most traded currency in the world after the United States Dollar. So, the Euro is a very important currency which affects almost the whole world. Any effect on the Euro directly or indirectly affects all other countries. The European Central Bank (ECB) is the institution of the European Union that administers the monetary policy of the 17 Eurozone member states. It is thus one of the most important central banks. ECBs main task is to maintain the euros purchasing power and thus price stability in the euro area. Foreign Exchange market is a marketplace where currencies of different countries are bought and sold. It is the largest financial market in world. It has a ginormous trading volume of $4 Trillion a day as compared to the measly $74 billion a day volume of New York Stock Exchange. It is a new concept in India. But in recent years it has gained tremendous popularity. It is unique for its large volume of trading per day. Forex trading is all about buying the currency of a country and simultaneously selling a currency of another country. Currencies are traded in currency pairs. For Ex. Euro and the U.S. Dollar (EUR/USD) or the Great Britain Pound with U.S. Dollar (GBP/USD). As in case of any commodity, there is a price for any purchase or sale of a currency. Such a price in the foreign exchange market is called as exchange rate. This is defined as
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro the number of units of one currency that will be exchanged for a unit of another currency. The exchange rate of a currency can be expressed in two ways: one in terms of the number of foreign currency units against a unit of domestic currency known as an Indirect method or Indirect Quoting. For Ex. 1 INR = 0.0147 EUR which implies,1 INR is worth 0.0147 Euro or 1 INR = 0.0180 USD which implies, 1 INR is worth 0.0180 US Dollar And the other in terms of the number of domestic currency units against a unit of domestic currency known as Direct method or Direct Quoting For Ex. 1 EUR = 68.0360 INR which implies, 1 EUR is worth 68.0360 INR Or 1 USD = 55.5310 INR which implies, 1 USD is worth 55.5310.
GUSTAVS THEORY According to this theory, the factors which determine the exchange rates are the intrinsic purchasing power of the currencies in their own domestic economies. Forex is a free floating market. So, the exchange rates are determined by the demand and supply of the currency. Lets take the example of Dollar vis--vis Rupees, the exchange rate is determined by the demand and supply of dollars in relation to rupee. Those who demand dollars are primarily Importers from USA to India who are paid by the importers in dollars. Similarly, those who supply dollars are primarily the exporters from India to USA who are paid in dollars by importers in USA. As mentioned above the rate of exchange is determined at any movement by the forces of the demand and supply of a currency which in turn depends on the demand and supply of the commodities and services as between the countries. In the above example, it depends on the demand and supply of the commodities and services as between India and USA. For Example: The net value of exports and imports will affect the economy of the country, and this in turn will affect the value of the currency. This net balance of Exports and imports is called the Balance of Payments (BOP). Lets assume there is a positive value of Balance of Payment, it will be good for the
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro particular country. This is a positive sign for the countrys economy. So, this will lead to appreciation in the value of the currency or we can say it will strengthen the currency. The exchange rates also depend on arbitrage and interest rate speculation, currency speculation and short term capital flows if these are permitted. Like this there are many other factors which will lead to change in the currency value. Few of the important factors are: Relative Inflation Rates: Inflation is the rise in the prices of goods and services in an economy over a period of time. Suppose the supply of EUR increased relative to that of the demand. The excess increase in the supply of EUR will lead to inflation in the Eurozone. There are many other factors apart from demand and supply which will increase or decrease the Inflation level of the economy. Inflation is one of the most important factors which affect the value of the currency. Lets see how it affects the value of a currency. Suppose the inflation rate in U.S. is 10%. After a month or so it increased to 11.5%. Due to the increase in inflation, the demand for U.S. products in the world market will decrease. So, the supply will increase. This will lead to decrease in the value of the currency. Alternatively, if the inflation in U.S. decreases to 9%, the demand for U.S. products will increase. And this in turn will lead to increase in the currency value. Relative Interest Rates: Interest rates prevalent in the country also affect the value of the countrys currency. A rise in the interest rate in a country will lead to an increase in the demand for that countries security. So, everyone will start buying these countries securities. This will lead to an increase in value of the currency of that country. A rise in EURO interest rates relative to U.S. rates, all else being constant will cause investors to switch from dollar to euro denominated securities to take advantage of the higher euro rates. The net result will be depreciation of USD in the absence of government intervention. But the currencies are traded in pairs. So, we need to see which currencies interest rate is relatively increased or decreased more in order to know the increase or decrease in that currency pairs value. Government as well as the central banks main motive is to stabilise the currency and maintain its purchasing power. So, in situations when the currency value is declining continuously, government and central banks start interfering by one or the other method. In case of increase of inflation of the country, the countrys economy starts
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro suffering. So, the central bank starts increasing the interest of the securities of the country. This will lead to decrease in inflation in the economy, which in turn will result in increase in the currency value. For Example. Lets assume the inflation rate of Eurozone 6 months before was 9% and interest rate was 7%. Now it increased to 12%. As a result, the value of the currency decreased drastically. The government and the central bank are worried now. They will now want to do something which will help them to stabilise the economy. The best possible option available for them is increase the interest of the securities they are offering. So, lets say, they increased the interest rate to 8.5%. This will compel the investors to invest the securities of Eurozone, which will start increasing the value of the EUR. Relative Economic Growth rates: Similarly a nation with strong economic growth will attract investment capital seeking to acquire domestic assets. The demand for domestic currency in turn will result in an increased demand for the domestic currency and will strengthen it, other things being equal. Conversely, nations with poor growth prospects will see an exodus of capital and weaker currency. Political and Economic Risk: Other factors that can influence the currency value include political and Economic risks. Investors prefer to hold lesser amounts of riskier assets, thus, low risk currencies, those currencies which are associated with more politically and economically stable nations are more highly valued than high risk currencies. OTHER FACTORS The traders who trade in the foreign exchange market keep tracking different news which affects the economy, whether its a small impact or a big impact. Few of these news could be related to: o Central Banks monetary policy changes: It contains statistical data of the previous changes they have made. And what they are likely to do in future. Mainly on interest rate decision, repo rate, reverse repo rate etc. It also contains economic conditions from the banks viewpoint. o Statistical data of different Countries:It may contain total value of domestic stocks, bonds, and money market assets purchased by foreigners as well as
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro domestic people and organisations during the reported month, quarter, half year or year. o Different Currencies Indices: It might contain the indices of different industries. For Exp. Indices of Steel Industry, Banks, Software etc. Lets say its the indices of Housing Industry. Then it will contain level of a diffusion index based on surveyed home builders. This will give an indication about how the particular industry in performing. And based on the performance how it will affect the currency value. o Major Global Meetings: Different governments of different countries hold many meetings to resolve some major issues which are affecting the whole world. Asthese meeting are held on a global basis and most of the major countries are involved in this. Any decision made on these meetings affects all the countries in the world and that too in a great extent. The effect is very high and the impact can be seen very quickly. For Exp. On June 19, 2012, there is a G20 meeting held in Mexico discussing on a range of global economic issues, including the Eurozone Debt crisis and IMF funding.G20 meetings are attended by financial ministers and central bankers from 20 industrialized nations including the G7 nations Canada, Italy, France, Germany, Japan, the UK and the US. These meetings are generally closed to the press, but officials usually talk with the reporters throughout the day, and a formal statement covering policy shifts and meeting objectives is released after the meetings have conducted. G20 is an influential policy making body operating at highest level. There initiatives and policies can impact the currency market. These were just few examples of the different news which the traders come across while trading in currency forex market. And based on these the trader takes his decision on whether to take a buying (long) position or a selling (short) position. While trading in the forex market one has to know certain basics. And it starts from knowing the name of the currencies which is being traded and their symbols. Below is the list of the major currencies which are being traded in the forex market with their symbols and their nicknames.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Symbol USD EUR Country United States Euro Member JPY GBP Japan Yen Yen Cable Currency Dollar FX Nick Name Buck Fiber
Zone Euro
Great Britain Pound Pound
CHF CAD AUD NZD
Switzerland Canada Australia New Zealand
Franc Dollar Dollar Dollar
Swissy Loonie Ausie Kiwi
o First two letters of the Symbol denotes the countrys name & the third letter denotes the name of the currency. o Exchange rates depend on the strength of the currency. MAJOR CURRENCY PAIRS Major currency pairs are pairs which contains USD in any of the sides. These are the most liquid pairs which are traded mostly in the forex market. These are: Pair EUR/USD USD/JPY GBP/USD Countries Euro zone / United States United States / Japan FX Nick Name Euro Dollar Dollar Yen
United Kingdom / United Pound Dollar States
USD/CHF
United States/ Switzerland
Dollar Swissy
25
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro USD/CAD United States / Canada AUD/USD Australia / United States NZD/USD New Zealand / United States Dollar Loonie Aussie Dollar Kiwi Dollar
CROSS CURRENCY PAIRS Cross currency pairs are pairs which doesnt consists USD in either side. EURO CROSSES Pair EUR/CHF EUR/GBP Countries Euro zone / Switzerland Euro zone / United Kingdom FX Nick Name Euro Swissy Euro Pound Euro Loonie Euro Aussie Euro Kiwi
EUR/CAD Euro zone / Canada EUR/AUD Euro zone / Australia EUR/NZD Euro zone / New Zealand
YEN CROSSES Pair EUR/JPY Countries Euro zone / Japan FX Nick Name Euro Yuppy GBP/JPY United Kingdom / Japan Pound Yen or Guppy CHF/JPY CAD/JPY Switzerland / Japan Canada / Japan Swissy Yen Loonie Yen Yen or
26
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro AUD/JPY NZD/JPY Australia / Japan New Zealand / Japan Aussie Yen Kiwi Yen
POUND CROSSES Pair GBP/CHF Currency United Switzerland GBP/AUD GBP/CAD GBP/NZD United Kingdom / Australia United Kingdom / Canada Pound Aussie Pound Loonie Kingdom FX Nick Name / Pound Swissy
United Kingdom / New Pound Kiwi Zealand
OTHER CROSSES Pair AUD/CHF Currency Australia / Switzerland FX Nick Name Aussie Swissy Aussie Loonie Aussie Kiwi Loonie Swissy Kiwi Swissy Kiwi Loonie
AUD/CAD Australia / Canada AUD/NZD Australia / New Zealand CAD/CHF NZD/CHF Canada / Switzerland New Zealand / Switzerland
NZD/CAD New Zealand / Canada
EXOTIC PAIRS Pairs made up of one major currency paired with the currency of an emerging currency
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro such as Brazil, Mexico, and Hungary etc.
Pairs
Currencies
FX Nick Name
USD/HKD United States / Hong Kong USD/SGD United Singapore USD/ZAR United States / South Dollar Rand Africa USD/THB United States / Thailand Dollar Baht Dollar Peso Dollar Krone States /
USD/MXN United States / Mexico USD/DKK USD/SEK United States / Denmark United States / Sweden
USD/NOK United States / Norway
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As we can see in the above figure, USD (dollar) is the most traded currency in forex, having up to 84.9% of all the transactions followed by EUR with 39.1%. TIMINGS OF DIFFERENT MARKETS Country Australia Japan Germany London Open time 2:30 AM 4:30 AM 12:30 PM 1:30 PM Close time 10:30 AM 12:30 PM 8:30 PM 9:30 PM
Traders have to keep an eye on the market timings of different countries. This will help them to make more profit by spending less time in trading. Most of the movement in the currency pair value happens in the opening and closing of different markets. So, traders usually prefer to trade in these timings only. Japanese Yen (JPY) Best to trade in: AUD/USD & NZD/USD
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Key Characteristics: o More movements in Asia Pacific currencies o Most movements takes place in opening time o After big moves in New York sessions, consolidation can be seen in Tokyo session Great Britain Pound (GBP) Best to trade in: EUR/USD, GBP/USD, USD/JPY Key Characteristics: o Crosses with other currencies timings lot of trading takes place high liquidity low transaction cost o Most volatile as high trading takes place o Trends start with London sessions and continue till the beginning of the New York session o Trends can sometimes reverse at the end of the London session, as European session traders may decide to lock profit New York (USD) Best to trade in: All currencies Key Characteristics: o Major movements in the market takes place o One European markets close up, liquidity volatility tends to die down during the afternoon. o very little movement in Friday afternoon BEST TIME TO TRADE According to what we can see in the above data relating to the timing of different countries and the information about which currency can be traded in those timings. We can say that the best timings to trade can be on: o Overlapping of sessions o European sessions
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o Mid of the weak WORST TIMINGS TO TRADE The worst timings to trade in the forex market can be on: o Sundays o Holidays FOREX QUOTE In the forex market, currencies are quoted in pairs as EUR/USD or USD/JPY. Where, the first currency to the left of the (/) is known as Base currency and the currency to the right side of it is known as the Counter or Quote currency.
In the forex market we are simultaneously buying one currency and selling another currency. While buying, the Exchange rate shows how many units of the Quote currency we have to pay to buy one unit of base currency. Whereas while selling, the Exchange rate shows how many units of quote currency you get for selling one unit of the base currency. So, buying EUR/USD means we are buying EUR and simultaneously selling USD. We buy a pair if we think that the base currency will appreciate relative to the quote currency. Alternatively, we should sell a pair if we think the base currency will depreciate relative to the quote currency.
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CHAPTER 4 RESEARCH METHODOLOGY
32
INTRODUCTION The research design of proposed study is analytical. The study is based on the secondary data and pertains to the historical prices of EURUSD and other pairs of Euros. This research is conducted to understand the relationship of EURUSD with the cross currency pairs of Euro. RESEARCH DESIGN The research that is being attempted is Descriptive in nature. Descriptive statistics including means, standard deviation, coefficient of variation and correlation were used to summarize the data. In an attempt to analyse the relation of the currency pairs, Correlation between these currency pairs has been calculated and to measure the performance of these pairs, monthly returns for the same has been calculated. SAMPLE PROFILE The data collected is mainly secondary in nature. It is related to the monthly closing prices of different currencies from 1/03/1991 till 1/06/2012, collected from the forex trading platform, Meta Trader 4. Quota sampling has been used while selecting the data. DIFFERENT TOOLS USED In order to calculate the performance and relation between the currency pairs of EUR and EUR/USD different statistical tools has been used. Which includes: RETURNS With most investments, an individual or business spends money today with the expectation of earning more money in the future. This concept of return provides investors with a convenient way to express the financial performance of an investment. For Example. Suppose you buy $10 for Rs.48 each. After 5 months you sell it for Rs.55 each. So, the returns per $ sold will be: = Rs.55 Rs.48
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro = Rs.7 But in order to make a meaningful judgement we need to scale the returns on % basis. Rate of Return = Amount received Amount invested Amount Invested = (55-48)/48 = 14.58% return MOVING AVERAGES Moving averages is an indicator used in technical analysis showing the average value of a securitys price over a set period. It is generally used to show the mean price over a certain number of previous prices. This smoothens the short term swings to get a better indication of the price trend. So, we can say that averages are trend following indicators. A moving average of daily prices is the average price of a share over a chosen period, displayed day by day. There are several types of moving averages. Of which I have used the following three moving averages for the analysis: o Simple Moving Average (SMA): Simple moving average is the simplest type of moving average, calculated adding up all the prices within the chosen time period and diving them by the total frequency. Most moving averages are based on closing prices. A 5-day simple moving average is the five day sum of closing prices divided by five. As its name implies, a moving average is an average that moves. Old data is dropped as new data comes available. This causes the average to move along the time scale. Below is an example of a 5-day moving average evolving over three days. Daily Closing Prices: 10, 11, 12, 13, 14, 15, 16, 17 First day of 5-day SMA = (10+11+12+13+14)/5 = 12 Second day of 5-day SMA = (11+12+13+14+15)/5 = 13 Third day of 5-day SMA = (12+13+14+15+16)/5 = 14 The first day of the moving average simply covers the last five days. The second day of the moving average drops the first data point (10) and adds the new data point (15). The
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro third day of the moving average continues by dropping the first data point (11) and adding the new data point (16). In this prices gradually increase from 10 to 16 over a total of seven days. THE LAG FACTOR
The longer the moving average, the more the lag. A 10-day Simple moving average will hug prices quite closely and turn shortly after prices turn. Short moving averages are like speed boats - nimble and quick to change. In contrast, a 100-day moving average contains lots of past data that slows it down. Longer moving averages are like ocean tankers - slow to change. It takes a larger and longer price movement for a 100-day moving average to change course. The above figure is depicting prices of EUR/USD as on 14th August 2012 on an hourly basis. I have taken 50, 100 and 200 period moving averages and it is clearly showing that the lower period moving average is close to the price movements to that of a higher period moving average. Same is the case for Exponential as well as Weighted Moving averages.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o Exponential Moving Average (EMA): It is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average. By Applying more weight on the recent prices Exponential Moving Average reduces
the lag in the movement of the curves due to the change in the prices. The weighting applied to the most recent price depends on the number of periods in the moving average. There are three steps to calculating an exponential moving average: (i) Calculate the simple moving average. An exponential moving average (EMA) has to start somewhere so a simple moving average is used as the previous period's EMA in the first calculation. (ii) (iii) Calculate the weighting multiplier. Calculate the exponential moving average.
Formula for a 10-day Exponential Moving Average is given below: Step 1 SMA: 10 period sum / 10 Step 2 Coefficient Factor: (2 / (Time periods + 1)) = (2 / (10 + 1)) = 0.1818 Step 3 EMA: [{Close EMA (previous day)} x Coefficient Factor] + EMA (previous day) The above figure of Exponential shows 50, 100 & 200 hours EMA.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro o Weighted Moving Average: It is an average in which each quantity to be averaged is assigned with a weight. These weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that many like items with the same value involved in the average. Weighted moving average places more importance on the recent price moves, therefore it reacts more quickly to the recent price changes than the regular Simple Moving Average. A basic example (3-period) of how the Weighted Moving Average is calculated is presented below: Prices of the past 3 days have been 10, 11 & 12. Since there are 3 periods, the most recent day (12) gets a weight of 3, the second recent day (11) receives a weight of 2, and the last day of the 3-periods (10) receives a weight of just one. Then the calculation is as follows: [(3 x 12) + (2 x 11) + (1 x 10)] / 6 = 11.333
The above figure of Exponential shows 50, 100 & 200 hours WMA.
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SMA vs EMA vs WMA
LIMITATION o Only Secondary data has been used for the analysis. o For many Cross-currency pairs of Euro, exchange rates data was not available from 1/03/1991 as these currency pairs were not trading at that time. Most of the currencies started trading only from 2009. STANDARD DEVIATION A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. It is useful in comparing sets of data which may have the same mean but a different range. For Example, the mean of the following two is the same: 15, 15, 15, 14, 16 and 2, 7, 14, 22, 30. However, the second is clearly more spread out. If a set has a low standard deviation, the values are not spread out too much. A basic example of how the Standard Deviation is calculated is presented below:
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Standard Deviation of 4, 9, 11, 12, 17, 5, 8, 12, 14 Mean: 10.222 As it is a non-grouped data, the formula will be:
The Standard Deviation using the formula is 3.94. For a grouped data, the formula will be:
COEFFICIENT OF VARIATION Coefficient of variation is a statistical measure of the dispersion of data points in a data series around the mean. It represents the ratio of the standard deviation to the mean, and it is a useful statistic for comparing the degree of variation from one data series to another, even if the means are drastically different from each other. Coefficient of variation can be easily calculated using the below formula:
Coefficient of Variation is basically calculated when there is a contradictory situation while comparing two stocks or currencies, where returns of one currency is better while the risk involved in the other stock is less. In these types of situation coefficient of variation is computed and lower COV stock/ currency is considered better.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro CORRELATION Correlation is the degree to which two or more quantities are linearly associated. It is a statistical measure showing how two securities move in relation to each other. It shows whether and how strongly pairs of variables are related. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. Correlation can be calculated using the formula:
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CHAPTER 5 DATA ANALYSIS AND INTERPRETATION
41
DATA ANALYSIS For data analysis closing prices of 16 cross currency pairs for a period from 1991 to 2012 has been taken and the performance and correlation of these currency pairs has been compared with EURUSD. For analysing the performance of the different cross currency pairs of Euro along with EURUSD, different statistical tools have been used. First of all I have calculated monthly returns of the currency pairs. This will work as a base for analysing the performance as well as relationship between the currency pairs. In order to analyse the performance of these currency pairs, I have calculated the average returns of these currency pairs. Three different types of moving averages were used to get a better idea regarding the average returns. After that I have calculated Standard deviation of these currency pairs to know how much it is varying to know the risk involved with these pairs. Then, to know which currency pair is better of all, I have calculated Coefficient of variation (COV) which includes the effect of both the risk as well as the returns. The currency pair with the lower COV will be the better & most preferred by the investors. Now in the last parts I have calculated Correlation between the cross currency pairs of euro with the major pair of Euro (EURUSD). This will show which cross currency pairs is having the strongest & weakest relationship with EURUSD.
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Table 1: SMA, WMA, EMA, COV & Correlation of 16 cross currency pairs of Euro & the Euro Major (EURUSD)
Correlation (with respect to EURUSD)
Currency Pairs EURUSD EURGBP EURCHF EURJPY EURAUD EURCAD EURNZD EURTRY EURHKD EURZAR EURSGD EURSEK EURPLN EURNOK EURHUF EURDKK EURCZK
SMA
WMA
EMA
Standard Coefficient of Deviation Variation 0.03203 0.02512 0.01755 0.03553 0.10199 0.02929 0.02911 0.03710 0.03475 0.03834 0.02348 0.01809 0.03086 0.01682 0.03215 0.00055 0.01764 13.34527 10.98605 -9.74777 -31.81977 37.02576 -290.42445 -33.79827 7.07475 841.59828 -8.38280 -4.82671 -3.60186 -36.13352 -3.88808 679.51003 -10.13455 -9.66483
0.00240 0.00229 -0.00180 -0.00112 0.00275 -0.00010 -0.00086 0.00524 0.00004 -0.00457 -0.00486 -0.00502 -0.00085 -0.00433 0.00005 -0.00005 -0.00183
0.00179 0.00209 -0.00213 -0.00128 0.00049 -0.00121 0.52883 0.00360 -0.00311 0.00141 -0.00562 -0.00350 0.00171 -0.00331 0.00169 -0.00008 0.00089
0.00236 0.00221 -0.00176 -0.00117 0.00261 -0.00013 -0.00093 0.00506 -0.00088 -0.00322 -0.00541 -0.00485 -0.00054 -0.00430 0.00029 -0.00006 -0.00110
0.59968 0.22001 0.57065 -0.11270 0.58905 0.10979 0.28561 0.99649 0.16476 0.81495 -0.01570 -0.29213 -0.04627 -0.40046 0.48752 -0.41859
EURUSD vs. EURGBP The below given graph depicts the return comparison of EURUSD & EURGBP.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURGBP

0.20000
0.15000
0.10000
RETURNS
0.05000 EURUSD 0.00000 2012.05.01 2011.08.01 2010.11.01 2010.02.01 2009.05.01 2008.08.01 2007.11.01 2007.02.01 2006.05.01 2005.08.01 2004.11.01 2004.02.01 2003.05.01 2002.08.01 2001.11.01 2001.02.01 2000.05.01 1999.08.01 1998.11.01 1998.02.01 1997.05.01 1996.08.01 1995.11.01 1995.02.01 1994.05.01 1993.08.01 1992.11.01 1992.02.01 1991.05.01 EURGBP
-0.05000
-0.10000
-0.15000
DATES
EURUSD & 0.00229 for EURGBP. So, we can clearly say that EURUSD is giving a better return as compared to that of EURGBP. But the results of the WMA & EMA shows that latest prices of EURUSD are leading the average to increase whereas in case of EURGBP its leading the average to fall. This is most certainly because EURUSD is performing well in recent times. Whereas, in case of EURGBP, the fall or decrease in average shows that the currency pair is not performing well in recent times. Standard Deviation of EURUSD is 0.03203 & EURGBP is 0.02512. It indicates that EURUSD is more risky than that of EURGBP. So, it is not wise to invest in this currency for longer period. But for speculation purpose EURUSD can serve as a good option. Whereas we can see that EURGBP is less risky to invest. The coefficient of variation of EURUSD is 13.34527 & EURGBP is 10.98605. This indicates that EURGBP is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coeffient of variation. Correlation figure of EURGBP with EURUSD is 0.59968 which is a good positive
44
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro correlation. It shows that both these pairs sometimes move in the same direction. That is, if one pair is moving upwards, the other pair will also move in the upward direction & if one pair is moving in the downward direction, the other pair is most likely to move in the same downward direction. But this pattern doesnt always fallows as the correlation between the pairs is not very good.
EURUSD vs. EURCHF The below given graph depicts the return comparison of EURUSD & EURCHF. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURCHF

0.15000
0.10000
0.05000 RETURNS
0.00000 2012.05.01 2011.08.01 2010.11.01 2010.02.01 2009.05.01 2008.08.01 2007.11.01 2007.02.01 2006.05.01 2005.08.01 2004.11.01 2004.02.01 2003.05.01 2002.08.01 2001.11.01 2001.02.01 2000.05.01 1999.08.01 1998.11.01 1998.02.01 1997.05.01 1996.08.01 1995.11.01 1995.02.01 1994.05.01 1993.08.01 1992.11.01 1992.02.01 1991.05.01
EURUSD EURCHF
-0.05000
-0.10000
-0.15000
DATES
EURUSD & -0.00180 for EURCHF. On an average EURCHF is giving a negative return which has improved in both WMA & EMA. So, this currency pair can be used to make profits using short selling. Standard Deviation of EURCHF is 0.01755 which indicates that EURUSD is less risky. The coefficient of variation of EURUSD is 13.34527 & EURCHF is -9.74777. This indicates that EURUSD is a better option to invest for a long run as it is having
45
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURCHF is 0.22001 which depicts a very low positive relation between the price movements of these two currency pairs.
EURUSD vs. EURJPY The below given graph depicts the return comparison of EURUSD & EURJPY. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00112 for EURJPY. On an average EURJPY is giving a negative return
Returns of EURUSD vs EURJPY

0.15000 0.10000 0.05000 0.00000 2012.05.01 2011.08.01 2010.11.01 2010.02.01 2009.05.01 2008.08.01 2007.11.01 2007.02.01 2006.05.01 2005.08.01 2004.11.01 2004.02.01 2003.05.01 2002.08.01 2001.11.01 2001.02.01 2000.05.01 1999.08.01 1998.11.01 1998.02.01 1997.05.01 1996.08.01 1995.11.01 1995.02.01 1994.05.01 1993.08.01 1992.11.01 1992.02.01 1991.05.01 EURUSD EURJPY -0.05000 -0.10000 -0.15000 -0.20000
RETURNS
DATES
which has even worsened when we see the WMA & EMA figures. This shows that this currency is performing even worse in the present times. So, this currency pair can be used to make profits using short selling. Standard Deviation of EURCHF is 0.03553 which indicates that EURJPY is riskier than that of EURUSD. There is very high variation in the returns of this currency pair. So, we can use this currency for speculation purpose.
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro The coefficient of variation of EURUSD is 13.34527 & EURJPY is -31.81977. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURJPY is 0.57065 which depicts a good positive relation between the price movements of these two currency pairs. So, we can say that sometimes these currency pairs move in the same direction.
EURUSD vs. EURAUD The below given graph depicts the return comparison of EURUSD & EURGBP. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURAUD

1.20000 1.00000 0.80000 0.60000 0.40000 RETURNS 0.20000 0.00000 -0.20000 -0.40000 -0.60000 -0.80000 DATES 2012.05.01 2011.11.01 2011.05.01 2010.11.01 2010.05.01 2009.11.01 2009.05.01 2008.11.01 2008.05.01 2007.11.01 2007.05.01 2006.11.01 2006.05.01 2005.11.01 2005.05.01 2004.11.01 2004.05.01 2003.11.01 2003.05.01 2002.11.01 2002.05.01 2001.11.01 2001.05.01 2000.11.01 2000.05.01 1999.11.01 1999.05.01 EURUSD EURAUD
EURUSD & 0.00275 for EURCHF. On an average EURCHF is giving a negative return which has improved in both EMA. Of the two currency pairs, EURAUD is giving better returns if we look only at the Simple Moving Average. But this high return of EUR AUD has fallen when we look at the WMA & EMA. This implies that this currency pair
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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro was performing very well in the past. But now, its performance has fallen drastically. Standard Deviation of EURAUD is 0.10199 which indicates that EURUSD is less risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURCHF is 37.02576. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURCHF is -0.11270 which depicts a very low negative relation between the price movements of these two currency pairs. So, we can say the price movements of these two currency pairs are not depended on each other.
48
EURUSD vs. EURCAD The below given graph depicts the return comparison of EURUSD & EURCAD. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURCAD

0.15000
0.10000
0.05000 RETURNS
0.00000 2012.05.01 2011.11.01 2011.05.01 2010.11.01 2010.05.01 2009.11.01 2009.05.01 2008.11.01 2008.05.01 2007.11.01 2007.05.01 2006.11.01 2006.05.01 2005.11.01 2005.05.01 2004.11.01 2004.05.01 2003.11.01 2003.05.01 2002.11.01 2002.05.01 2001.11.01 2001.05.01 2000.11.01 2000.05.01 1999.11.01
EURUSD EURCAD
-0.05000
-0.10000
-0.15000
DATES
EURUSD & -0.00010 for EURCAD. On an average EURCAD is giving a negative return which has even worsened in both WMA & EMA. So, this currency pair can be used to make profits using short selling. Standard Deviation of EURCAD is 0.02929 which indicates that EURCAD is less risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURCAD it is -290.42445. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURCAD is 0.58905 which depicts a good positive
49
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro relation between the price movements of these two currency pairs.
EURUSD vs. EURNZD The below given graph depicts the return comparison of EURUSD & EURNZD. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURNZD

0.15000
0.10000
0.05000 RETURNS
0.00000 2012.05.01 2011.11.01 2011.05.01 2010.11.01 2010.05.01 2009.11.01 2009.05.01 2008.11.01 2008.05.01 2007.11.01 2007.05.01 2006.11.01 2006.05.01 2005.11.01 2005.05.01 2004.11.01 2004.05.01 2003.11.01 2003.05.01 2002.11.01 2002.05.01 2001.11.01 2001.05.01 2000.11.01 2000.05.01 1999.11.01 1999.05.01
EURUSD EURNZD
-0.05000
-0.10000
-0.15000
DATES
EURUSD & -0.00086 for EURNZD. On an average EURNZD is giving a negative return which has even worsened in both WMA & EMA. So, this currency pair can also be used to make profits using short selling. Standard Deviation of EURNZD is 0.02911 which indicates that EURNZD is less risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURNZD it is -33.79827. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation.
50
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Correlation between EURUSD & EURNZD is 0.10979 which depicts a a very low positive relation between the price movements of these two currency pairs.
EURUSD vs. EURTRY The below given graph depicts the return comparison of EURUSD & EURTRY. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURTRY

0.2
0.15
0.1
RETURNS
0.05 EURUSD 0 EURTRY
2011.02.01
2012.05.01
2012.02.01
2011.11.01
2011.08.01
2011.05.01
2010.11.01
2010.08.01
2010.05.01
2010.02.01
2009.11.01
2009.08.01
2009.05.01
2009.02.01
2008.11.01
2008.08.01
2008.05.01
2008.02.01
2007.11.01
2007.08.01
-0.05
-0.1
-0.15
DATES
EURUSD & 0.00524 for EURTRY. On an average EURTRY is giving a positive return which has been good in both WMA & EMA also. Standard Deviation of EURTRY is 0.03710 which indicates that EURTRY is more risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURTRY it is 7.07475. This indicates that EURTRY is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of
2007.05.01
51
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro variation. Correlation between EURUSD & EURTRY is 0.28561 which depicts a very low positive relation between the price movements of these two currency pairs.
EURUSD vs. EURHKD The below given graph depicts the return comparison of EURUSD & EURTRY. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURHKD

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURHKD
DATES
EURUSD & 0.00524 for EURTRY. On an average EURTRY is giving a positive return which has been good in both WMA & EMA also. Standard Deviation of EURTRY is 0.03710 which indicates that EURTRY is more risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURTRY it is 7.07475. This indicates that EURTRY is a better option to invest for a long run as it is having relatively
52
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURTRY is 0.28561 which depicts a very low positive relation between the price movements of these two currency pairs.
EURUSD vs. EURZAR The below given graph depicts the return comparison of EURUSD & EURZAR.
Returns of EURUSD vs EURZAR

0.15000
0.10000
0.05000 RETURNS
0.00000
EURUSD EURZAR
-0.05000
-0.10000
-0.15000
DATES
Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00457 for EURZAR. On an average EURZAR is giving negative returns which has improved in WMA but has drastically decreased in EMA. Standard Deviation of EURTRY is 0.03834 which indicates that EURZAR is more risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURZAR it is -8.38280. This indicates that EURUSD is a better option to invest for a long run as it is having
53
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURZAR is 0.16476 which depicts a a very low positive relation between the price movements of these two currency pairs.
EURUSD vs. EURSGD The below given graph depicts the return comparison of EURUSD & EURSGD. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00486 for EURSGD. On an average EURSGD is giving negative returns
Returns of EURUSD vs EURSGD

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURSGD
DATES
which has even worsened in WMA as well as EMA. Standard Deviation of EURSGD is 0.02348 which indicates that EURSGD is less riskier than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURSGD it is -4.82671. This
54
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURSGD is 0.81495 which depicts a very high positive relation between the price movements of these two currency pairs.
EURUSD vs. EURSEK The below given graph depicts the return comparison of EURUSD & EURSEK. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00502 for EURSEK. On an average EURSEK is giving a negative return which has even worsened in WMA as well as EMA.
Returns of EURUSD vs EURSEK

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 DATES EURUSD EURSEK
Standard Deviation of EURSEK is 0.01809 which indicates that EURSEK is less risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURSGD it is -3.60186. This
55
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURSGD is -0.01570 which depicts a very low negative relation between the price movements of these two currency pairs.
EURUSD vs. EURPLN The below given graph depicts the return comparison of EURUSD & EURPLN. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURPLN

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURPLN
DATES
EURUSD & -0.00085 for EURPLN. On an average EURPLN is giving a negative return which has improved in WMA. Standard Deviation of EURPLN is 0.03086 which indicates that EURPLN is less risky than EURUSD.
56
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro The coefficient of variation of EURUSD is 13.34527 & EURPLN it is -36.13352. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURPLN is -0.29213 which depicts a very low negative relation between the price movements of these two currency pairs.
EURUSD vs. EURNOK The below given graph depicts the return comparison of EURUSD & EURNOK. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00433 for EURNOK. On an average EURNOK is giving a negative return which has worsened when we see the figures of in WMA & EMA. Standard Deviation of EURNOK is 0.01682 which indicates that EURNOK is less risky than EURUSD.
57
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro The coefficient of variation of EURUSD is 13.34527 & EURPNOK it is -3.88808. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURNOK is -0.04627 which depicts a very
Returns of EURUSD vs EURNOK

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURNOK
DATES
low negative relation between the price movements of these two currency pairs.
EURUSD vs. EURHUF The below given graph depicts the return comparison of EURUSD & EURHUF. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & 0.00005 for EURHUF. On an average EURHUF is giving a positive return which has improved when we see the figures in WMA & EMA. This shows that the currency pair is performing better in the now a days. Standard Deviation of EURHUF is 0.03215 which indicates that EURNOK is more risky than EURUSD.
58
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro The coefficient of variation of EURUSD is 13.34527 & EURPHUF it is 679.51003. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURHUF is -0.40046 which depicts a very low negative relation between the price movements of these two currency pairs.
Returns of EURUSD vs EURHUF

0.1 0.08 0.06 0.04 0.02 RETURNS 0 -0.02 -0.04 -0.06 -0.08 -0.1 EURUSD EURHUF
DATES
EURUSD vs. EURDKK The below given graph depicts the return comparison of EURUSD & EURSGD. Moving Averages: Simple moving average shows an average return of 0.00240 for EURUSD & -0.00486 for EURSGD. On an average EURSGD is giving negative returns which has even worsened in WMA as well as EMA.
59
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro Standard Deviation of EURSGD is 0.02348 which indicates that EURSGD is less riskier than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURSGD it is -4.82671. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURSGD is 0.81495 which depicts a very high positive relation between the price movements of these two currency pairs.
Returns of EURUSD vs EURDKK

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURDKK
DATES
60
EURUSD vs. EURCZK The below given graph depicts the return comparison of EURUSD & EURPLN. Moving Averages: Simple moving average shows an average return of 0.00240 for
Returns of EURUSD vs EURCZK

0.10000 0.08000 0.06000 0.04000 0.02000 RETURNS 0.00000 -0.02000 -0.04000 -0.06000 -0.08000 -0.10000 EURUSD EURCZK
DATES
EURUSD & -0.00085 for EURPLN. On an average EURPLN is giving a negative return which has improved in WMA. Standard Deviation of EURPLN is 0.03086 which indicates that EURPLN is less risky than EURUSD. The coefficient of variation of EURUSD is 13.34527 & EURPLN it is -36.13352. This indicates that EURUSD is a better option to invest for a long run as it is having relatively less risk and with a relatively higher return when compared using coefficient of variation. Correlation between EURUSD & EURPLN is -0.29213 which depicts a very low negative
61
Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro relation between the price movements of these two currency pairs.
62
CHAPTER 5 FINDINGS & CONCLUSION
63
FINDINGS EURTRY gives highest returns. EURDKK is least risky. EURTRY is the best currency pair to invest for long run. EURHKD is having +ve highest correlation with EURUSD followed by EURSGD. EURHUF is having highest ve correlation with EURUSD.
CONCLUSIONS When we dont a clue about where to start and which currency can be better for investing and which one will be better for speculating, we can go about analysing the currency pairs with Moving averages, Standard deviation & Coefficient of varation to know which pair is performing the best and in order to know the relationship between the pairs go for finding the correlation. Now, youll be having some selected currency pairs which you can monitor on a day to day basis to have better understanding.
64
CHATPER 6 SUGGESTIONS
65
SUGGESTIONS While taking the trading decision one should look at the returns & risk. This can also be used as a hedging tool to minimize the risk. He should also take into consideration the relation of the currency pairs it can help you make simultaneous profits in two currency pairs if we are confident about the movement of one of the currency.
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REFERENCES Books Referred: Investment & Portfolio Management, By Riley & Brown Multinational Financial Management, By Alan C Shapiro International Finance, By V.A. Avadhani
BIBLIOGRAPHY I also took help of the following websites: www.babypips.com www.forexfactory.com www.stockscharts.com www.wikipedia.org search.ebscohost.com www.ecb.int/home/html/index.en.html
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Study of Performance & Correlation of EURUSD With The Cross Currency Pairs of Euro

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Study of Performance & Correlation of EURUSD with the cross currency pairs of Euro

Harvest Futures Consultants India Pvt. Ltd

Suneesh L B5-29 PGDM BIFAAS

Faculty Guide: Mr. LohithKumar B Assistant Professor Finance

Project Guide LohithKumar B

Place: SECUNDERABAD Date:

CHAPTER 2 INDUSTRY AND COMPANY PROFILE

FOREX MARKET STRUCTURE

CHAPTER 3 THEORITICAL ASPECTS OF THE STUDY

Great Britain Pound Pound

CHF CAD AUD NZD

Switzerland Canada Australia New Zealand

Franc Dollar Dollar Dollar

Swissy Loonie Ausie Kiwi

United Kingdom / United Pound Dollar States

United States/ Switzerland

United Kingdom / New Pound Kiwi Zealand

NZD/CAD New Zealand / Canada

USD/NOK United States / Norway

CHAPTER 4 RESEARCH METHODOLOGY

SMA vs EMA vs WMA

CHAPTER 5 DATA ANALYSIS AND INTERPRETATION

Returns of EURUSD vs EURGBP

Returns of EURUSD vs EURCHF

Returns of EURUSD vs EURJPY

Returns of EURUSD vs EURAUD

Returns of EURUSD vs EURCAD

Returns of EURUSD vs EURNZD

Returns of EURUSD vs EURTRY

0.05 EURUSD 0 EURTRY

Returns of EURUSD vs EURHKD

Returns of EURUSD vs EURZAR

Returns of EURUSD vs EURSGD

Returns of EURUSD vs EURSEK

Returns of EURUSD vs EURPLN

Returns of EURUSD vs EURNOK

Returns of EURUSD vs EURHUF

Returns of EURUSD vs EURDKK

Returns of EURUSD vs EURCZK

CHAPTER 5 FINDINGS & CONCLUSION

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