The relationship between the forward– and the realized spot exchange rate in South Africa
Van Heerden, Petrus Marthinus Stephanus
MetadataShow full item record
The inability to effectively hedge against unfavourable exchange rate movements, using the current forward exchange rate as the only guideline, is a key inhibiting factor of international trade. Market participants use the current forward exchange rate quoted in the market to make decisions regarding future exchange rate changes. However, the current forward exchange rate is not solely determined by the interaction of demand and supply, but is also a mechanistic estimation, which is based on the current spot exchange rate and the carry cost of the transaction. Results of various studies, including this study, demonstrated that the current forward exchange rate differs substantially from the realized future spot exchange rate. This phenomenon is known as the exchange rate puzzle. This study contributes to the dynamics of modelling exchange rate theories by developing an exchange rate model that has the ability to explain the realized future spot exchange rate and the exchange rate puzzle. The exchange rate model is based only on current (time t) economic fundamentals and includes an alternative approach of incorporating the impact of the interaction of two international financial markets into the model. This study derived a unique exchange rate model, which proves that the exchange rate puzzle is a pseudo problem. The pseudo problem is based on the generally excepted fallacy that current non–stationary, level time series data cannot be used to model exchange rate theories, because of the incorrect assumption that all the available econometric methods yield statistically insignificant results due to spurious regressions. Empirical evidence conclusively shows that using non–stationary, level time series data of current economic fundamentals can statistically significantly explain the realized future spot exchange rate and, therefore, that the exchange rate puzzle can be solved. This model will give market participants in the foreign exchange market a better indication of expected future exchange rates, which will considerably reduce the dependence on the mechanistically derived forward points. The newly derived exchange rate model will also have an influence on the demand and supply of forward exchange, resulting in forward points that are a more accurate prediction of the realized future exchange rate.
- ETD@PUK 
Showing items related by title, author, creator and subject.
Empirical investigation of systems cost estimation models in the Limpopo Province of South Africa: a requirement modelling problem Moyo, Benson; Huisman, Magda (CSREA, 2014)There are many factors believed to be important to systems development cost estimation. However an in-depth analysis demonstrates requirements as central cost drivers. The various transformations requirements go through ...
Van der Vyver, Charles (North-West University, 2007)The registration model is a very important part of any tertiary education institution's value chain, as this is the first contact that many students have with the institution. Therefore it is of extreme importance that ...
Do they adapt or react? A comparison of the adaptation model and the stress reaction model among South African unemployed Yannick Griep; Elfi Baillien; Wouter Vleugels; Sebastiaan Rothmann; Hans De Witte (Springer, 2014)This study investigates affective experience as a function of unemployment duration in South Africa. The study contrasts two models. The stress reaction model proposes a linear decrease of affective experience as unemployment ...