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Study of Volatility in Foreign

Exchange Market: A Macro-

Economic Perspective

Dr Sunita Jindal

Dr N.K Sharma


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Introduction

The foreign exchange volatility has a directimpact on the macroeconomic factors

Current account deficit, the balance of

trade, the Forex reserves created bygovernment, the stock market, the profitmargins of different sectors of industries,the interest rates, export import paymentsand hedging all are affected by thefluctuation in the currency i.e. its volatility.


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Objective of the study

To establish the relationship and find out the reasonand effect of the exchange rate volatility on balanceof trade and economy as a whole.

The measures taken by the RBI to contain the

excessive fluctuations. The whole of the study hasbeen made keeping in view the Indian economicconditions.

INR has been taken as the basic currency in contraryto which the other currencies (USD,JPY,CHF, EUR.GBP) taken to determine the exchange rate and thenthe correlative study has been made after taking thehypothesis.


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Scope of Study

This study would reveal the variations in

the foreign exchange and thus would help

in analyzing the trade.

The study will provide an understanding of

the various factors that create an impact

on stock market in the country (India)


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Research Methodology

Data is collected from secondary sources

like RBI websites, and NSE websites.

After collecting this data correlation is

used for analysis and interpretation.Correlation is a statistical measurement of

the relationship between two variables.

Possible correlations range from +1 to1.


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Hypothesis

Ho: Exchange rate volatility has no effect

on the macro economic factors as stock

market and balance of trade.

H1: Exchange rate volatility has effect on

the stock market fluctuations

H2: Fluctuations in the currency market

affect balance of trade


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Testing of Hypothesis

H1: Exchange rate volatility has effect on the

stock market fluctuations

For testing the hypothesis average value of five

currencies USD. JPY, CHF. EUR, GBP is taken.On X axis % change in currencies are taken as

X an independent variable and % change in

yearly value of Sensex is taken as Y, then

correlation is calculated and interpretation isgiven after the value of correlation. In each case

validity of correlation value is interpreted.


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The Correlation ( r ) between (USD

And INR) And BSE Sensex

r= 0.228368Year % in rateINR/USD(X)

% in value of

Sensex

2010-11 0.455 -14.684

2009-10 5.594 14.844

2008-09 -11.729 44.761

2007-08 -4.870 110.2862006-07 12.590 32.041

2005-06 1.889 31.834


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. The Correlation (r) between (INR

and JPY) And BSE Sensex

r= 0.395969Year % in rate

INR/JPY(X)

% in value of

Sensex

2010-11 -6.215 -14.684

2009-10 .650 14.844

2008-09 -23.902 44.761

2007-08 -19.082 110.286

2006-07 11.646 32.041

2005-06 1.189 31.834

C ( ) (


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The Correlation (r) between (INR

and CHF) And BSE Sensex


INR/USD(X)

% in value of

Sensex

2010-11 -10.266 -14.684

2009-10 -1.862 14.844

2008-09 -11.272 44.761

2007-08 -16.550 110.286

2006-07 9.639 32.041

2005-06 1.048 31.834

Th C l ti ( ) b t (INR


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and EUR) And BSE Sensex


INR/USD(X)

% in value of

Sensex

2010-11 -2.484 -14.684

2009-10 10.152 14.844

2008-09 -5.902 44.761

2007-08 12.739 110.286

2006-07 1.695 32.041

2005-06 5.460 31.834

Th C l ti ( ) b t (INR


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and GBP) And BSE Sensex


INR/USD(X)

% in value of

Sensex

2010-11 0.455 -14.684

2009-10 5.594 14.844

2008-09 -11.729 44.761

2007-08 -4.870 110.286

2006-07 12.590 32.041

2005-06 1.889 31.834


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Data Interpretation

correlation between (INR and USD) and BoTis r =0.666274

correlation between (INR and JPY) and BoTisr = 0.525871

correlation between (INR and CHF) and BoTisr = .275787

correlation between (INR and EUR) and BoTisr =0.114812

correlation between (INR and GBP) and BoTisr = -0.22013


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Hypothesis Testing -2

H2: Volatility in the foreign currencymarket affects the balance of trade

For testing this hypothesis, volatility in

Forex market is taken as independentvariable and balance of trade is dependentvariable. In following tables correlation iscalculated for the % change in fivecurrencies and % change in the value ofbalance of trade (BoT)


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Findings

Ho to be true as The volatility in the exchange marketdoes not affect volatility in the Stock Market in case ofUSD,JPY and GBP.

null hypothesis Ho to be rejected since the coefficient of

correlation is more tending to one. The hypothesis H1:Exchange rate volatility (CHF) has effect on the stockmarket fluctuations is correct.

Ho to be wrong since the coefficient of correlation ismore tending to one. The hypothesis H1: Exchange rate

volatility has effect on the stock market fluctuations iscorrect. This hypothesis is specifically being found tobe correct in the currency taken as EUR with respect toINR.


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Continued..

Null hypothesis been proved wrong and the

hypothesis taken as H2: Fluctuations in the

currency market affect on the balance of trade

has been proved right in case of USD and JPY Correlation between the variables does not exist

and is proving the null hypothesis Ho to be true

as The volatility in the exchange rate of

INR/CHF, EUR and GBP does not affect thevariations in the balance of trade. Both go

independently.


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Discussion

studyofvolatilityinforeignexchangemarket-120227001031-phpapp01

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