Salem College Dems

Forecasting Exchange Rates

Everyone seems to have secrets or plans for forecasting exchange rates. Let’s face it; if you can accurately forecast exchange rates, you can make money. But, remember that people train for years and years to try to forecast, and still they may incorrectly predict the exchange rates. This is a hobby for some people and for others it is a job. Some people have magic tricks and some attempts are conducted in a scientific fashion. There are many theories on the best way to approach, but whatever you do, base your estimates on dollars and facts, not on emotions. Consider two different approaches when forecasting: Using surveys and prior performance and looking to the tried and true models.

Using the survey approach for forecasting exchange rates, you will first need to look to the field to see who is currently having success and who is not. These names and companies of predictors will vary. You want to establish two-three that have had a record of recent success. What they did five years ago, while not show their current success. However, longevity in the filed with a company who surveys can show a trend of credibility and validity. Once you have the surveys you will use, look at them for patterns, and dive in with your forecasting hypotheses.

Models forecasting for exchange rates can be two-fold. Consider all linear and non-linear field models. If you do not know what that means, you will have to understand these concepts thoroughly before proceeding. With both types look at the variables carefully. Again, there will need to be a thorough investigation for the models that are having current successes. You can look to the longevity of a company, like you did with surveys, to check the credibility and validity of a model.

Obviously, the exchange rate is defined traditionally by using the price index, which will consider inflation, deflation, consumer indexes, and consumer price indexes. There are also logarithms to be factored into the equation. In addition to all of this, there are means, deviations, cumulative, stationary, and massive amounts of evidence to consider. If all of these things sound perplexing, note that this is a very complex process and people spend years and years exploring the act of forecasting exchange rates. Even with all these roadblocks, people still attempt to do this and on occasion their exchange rate predictions are dead-on.

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