Report Trade Finance And Exchange Rates Topic The Expected Exchange Rate Between The Two Currencies Is Cny Usd In 2023.Pdf

The exchange rate is a topic that is always discussed in financialissues; nevertheless, every action that requires the exchange of currencies between manycountries, such as import and ex

VIETNAM GENERAL CONFEDERATION OF LABOUR

TON DUC THANG UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION

REPORTTRADE FINANCE AND EXCHANGE RATES

TOPIC: THE EXPECTED EXCHANGE RATE BETWEEN THE TWO

Full name Student

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1 Nguyen Thi Hong Ngoc

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(3.2 – 3.3)Synthesis reportExplain whole content inVietnamese

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Chapter 1(1.1 – 1.2)Prepare slidesPresent part 3

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Chapter 2(2.2)Support design slides

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(3.1)Present part 1

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Chapter 2(2.1)Present part 2

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Currently, each country has policies and instruments in place to determine theexchange rate in their currency in relation to other countries based on economic, political,and social variations The exchange rate is a topic that is always discussed in financialissues; nevertheless, every action that requires the exchange of currencies between manycountries, such as import and export of goods, travel, or even foreign investment, mustconsider the exchange rate.

In this paper, we examine the CNY/USD exchange rate pair between China andthe United States in order to apply forecasting methodologies to their future exchangerate study in 2023 We chose this issue because they are two countries with significantworldwide influence, and there have been numerous problems between them in recentyears, including the US-China trade conflict and, most recently, the global pandemicCOVID-19

The contents of this report will help us better understand why multinationalcompanies or individual investors need to forecast exchange rates, how many techniquesare commonly used, how the application of IRP/IFE theories plays a role, and so on, withthe goal of assisting businesses/individuals in avoiding risks and making the bestdecisions possible This report will be divided into three primary sections:

● CHAPTER 1: THEORETICAL BASIS

● CHAPTER 2: OVERVIEW OF EXCHANGE RATE FORECASTINGKNOWLEDGE

● CHAPTER 3: ANALYSIS OF THE CNY/USD TREND IN 2023 BY USING AMARKET-BASED FORECASTING METHOD

CHAPTER 1: THEORETICAL BASIS

1.1 ESSENTIAL PRINCIPLES

1.1.1 SPOT RATE

The spot rate is the current market value based on what buyers are willing to payand how much sellers are willing to accept as payment for a commodities transaction.That is also why spot rates tend to fluctuate in huge ranges and are continually changing.The demand for foreign currency transactions by individuals, businesses, andforeign exchange traders influences the spot rate in currency trading Spot rates are usednowadays in commodities such as crude oil, gasoline, propane, cotton, gold, copper,coffee, wheat, lumber, and bonds Furthermore, if speculators know the future price, theycan determine the current rate using the risk-free rate

For example trading for commodity delivery, it is quite popular in the futures andtraditional contract markets, where the spot rate is at the moment of signing Traders cantrade options and other financial instruments for a position on a commodity or currencypair's spot rate to avoid the asset transfer process

1.1.2 FORWARD RATE

A forward rate is the interest rate or price of a financial transaction that will takeplace in the future, such as a security or currency, and is calculated using the spot rate toadjust the cost of storage to determine the interest rate futures equivalent to the totalreturn of a long-term investment versus a short-term investment

The forward rate stated in the futures exchange agreement is a contractualobligation to be observed by the parties involved in the foreign exchange market.Currency forwards, unlike futures, which have a defined contract amount and maturitydate, are widely used for hedging in the money markets

Forward rates are used in the bond market to evaluate a bond's future value Aninvestor can buy a one-year Treasury bill or a six-month Treasury bill and reinvestanother six-month Treasury bill after the first one matures Investors might choose aforward agreement that allows them to invest six months from now at the current forwardrate to reduce rollover risk

is an accurate and unbiased forecast of the prevailing spot exchange rate at the forwardcontract's maturity date Because the exchange rate is designed to reflect the market'sexpectations for the future spot rate, this is the case.

As a result, when using this forecasting technique, people will select theappropriate forecast index based on the time factor of import-export or investmentactivities; typically, the spot index will be used for forecasting in the near future, whilethe forward index will be used for forecasting in the long term

CHAPTER 2: OVERVIEW OF EXCHANGE RATE

FORECASTING KNOWLEDGE

2.1 THE MOTIVATION OF BUSINESSES WHEN USING EXCHANGERATE FORECASTING TECHNIQUES

Companies need to forecast currency rates for five reasons

a Making the best defense decision

This reason is related to receivables and payables in import and export businesses;forecasting the value of foreign currencies in the future will assist the business to mitigateseveral risks

b Decisions about short-term investments

This argument has to do with the investment currency's interest rate MNCs maychoose to invest big sums of money in large amounts of foreign currency withhigh-interest rates and value appreciation over time Predicting how future exchange rateswill fluctuate will assist businesses in determining the rate of return, which willdetermine whether or not the project is worthwhile

c Establish capital budgets and income projections

The parent firm and its subsidiary are connected for these two reasons When aproject necessitates regular currency exchanges, the parent business will considerinvesting They also examine whether profits should be reinvested in overseas companies

or returned to the parent business

When the parent company of a multinational corporation considers whether tospend capital on a foreign project that requires periodic currency exchanges, capitalbudgeting decisions are made Only when all expected cash flows are assessed in theparent company's local currency can a capital budgeting analysis be completed

In terms of income assessment, the parent firm must decide whether to reinvestprofits abroad or return profits to the parent company If the foreign currency is predicted

to decline significantly against the parent firm's home country currency, the parentcompany might choose to transfer subsidiary profits sooner before the domestic currencydeclines

d Long-term financial planning

Companies must evaluate how the cost of issuing bonds in foreign currencies increasesnot just when making investments, but also when raising funds from abroad to continuetheir operations

2.2 INTRODUCTION EXCHANGE RATE FORECASTING TECHNIQUES

2.2.1 TECHNICAL FORECASTING

This is a technique for forecasting future exchange rates based on historical data.About the benefit: investors will use the above accessible indicators (price andvolume of coins) on the market exchange to choose whether to purchase or sell if theirprices differ and can earn profits for investors, people usually call this activity

2.2.2 FUNDAMENTAL FORECASTING

Fundamental forecasting analysis looks at macroeconomic elements that can affectmarket volatility, such as inflation, interest rates, income, government policy, andexpectations, to help predict long-term market patterns Inflation and interest rates are thetwo most common causes, according to IFE, because currencies in nations with highinflation and high-interest rates often will fall over time When employing this technique,firms or service providers must have extensive expertise and experience with regressiondata analysis using software such as Eviews/SPSS/ in general, this is a methodrelatively complicated

Source:https://www.researchgate.net/Advantages: The research is based on an examination of economic aspects that canhelp provide a market overview of where and when to invest for strong long-term profits.Disadvantages: While software analysis can provide theoretically correct answers,this method requires a thorough examination of macro and microelements, which mighttake a long time to prepare Similarly, exchange rate influences are frequently variableand unpredictable This makes forecasting the future exchange rate of a currencychallenging for investors.

2.2.3 MARKET-BASED FORECASTING

By using market indices such as spot and forward rates, we can predict the futurevalue of money, which is the concept of market-based forecasting Forecasting theexchange rate by this method helps businesses make plans and the government makesplans and policies to suit the socio-economic development situation of the country

a Spot rate:

We can use today's spot rate to forecast the spot rate at a future date because itrepresents the market's expectations for the spot rate in the near future In practice, theexchange rate of a currency tends to change every day so the spot rate is used as the bestestimate of the spot rate in the near future

Suppose we have a currency pair CNY/USD = 6.71 ($1 = 6.71 CNY)

When the CNY is expected to UP against the USD in the near future, it willencourage speculators to buy CNY in USD today, which in turn pushes up the CNY priceimmediately However, if the CNY is predicted to depreciate, i.e when the CNY isexpected to DECREASE against the USD in the near future, the speculator will sell the

CNY today in the hope of buying them back at a lower level soon as they depreciate, thisreduces the price of CNY immediately.

After considering two aspects, we can see that the present value of CNY willreflect the expectation of its own value in the near future Companies can use this indexfor forecasting because the implication is that when using the spot rate, the currency willnot appreciate or depreciate

Table 1 Table of 2021-2022 exchange rate forecasts from RBC as of 05/02/2021

Source:https://www.exchangerates.org.uk/

In reality, currencies change all the time but this indicator is popular whenfinancial managers don't have a strong belief in whether the CNY currency willappreciate or depreciate, they just know that the currency's value will change and use thisindex as the best approximation of a currency's future

Advantage:

● The transaction value of the contract is unlimited

● Payment will be completed promptly upon request and within two business days

● Records and related documents are simple

● Applies to all currency pairs

● Can handle all customer needs in just two business days

● Receive and handle all needs of buying and selling foreign currencies for otherforeign currencies and local currencies.

Its value is quoted for a specific date in the future That is, the 30-day forward rategives a forecast for the spot rate in the next 30 days, the 90-day forward rate gives aforecast for the next 90-day spot rate, and so on

For example, if the 30-day forward rate of CNY is 6.9, this number is also theforecast of the spot rate of CNY in the next 30 days

Table 2 USD/RMB 6 Months in Apr 2022

Source:https://www.ceicdata.com/enThe forward rate formulas that we have learned in previous chapters are:

F = S*(1+p) & E(e) = p = (F/S) - 1Because “p” represents the % of the forward rate EXCEEDING the spot rate, itshows the % expected to change in the rate If the CNY 1-year forward rate is $0.95while the spot rate is $0.90, the expected % change in CNY is:

E(e) p = (F/S) - 1 = (0.95/0.90) - 1 = 0.05 or 5%

Advantage:

● The transaction can be done anytime, anywhere according to the agreement of thebuyer and the seller This saves time and unnecessary costs

● High enforceability, once the contract is signed, the parties are required to fulfilltheir obligations according to the terms contained in the contract in the mosthonest way.

● Transactions take place over a short period of time, so it is safer than trading over

a long period of time

Defect:

The transaction is mandatory, so it cannot be postponed or canceled even in theevent that one party is at a disadvantage and is likely to receive a lot of damage, inaddition, it can only handle future purchases or sales

Table 3 The application of mixed forecasting

Forecasting techniques Forecasts results WeightThe basic forecast is that CNY appreciates Ef = 2% W = 50%Technical forecast for CNY to fall Ef = -1% W = 20%Market-based forecast for CNY to depreciate Ef = -5% W = 30%Hence, the average based on the mixed forecast is: 2%*50% -1%*20% -5%*30%

= -0.007, This result indicates that the real forecast for the CNY currency is bearish 0.007

Using multiple methods at the same time consumes a lot of time and money Usingdifferent methods will sometimes give different results even when using the same datasource.

CHAPTER 3: ANALYSIS OF THE CNY/USD TREND IN 2023 BY USING A MARKET-BASED FORECASTING METHOD

3.1 OVERVIEW OF THE CNY/USD CHANGE IN RECENT YEARS AND

SIGNIFICANTLY

Financial professionals have forecasted the following future direction for theCNY/USD currency pair based on statistical results of the currency pair's movementthroughout the years:

Figure: Historical and forecast chart of the Dollar - Yuan currency pair

(Source: ceicdata.com)The CNY/USD currency pair is going down, as can be seen on the chart What iscausing this negative trend, are forecasting methodologies accurate, and what couldinvestors and import-export enterprises do to keep their business/project from goingbankrupt? This chapter will go over all you need to know about forecasting exchangerates

There are several reasons why CNY/USD is expected to fall in the future,including the following:

First, tensions between the United States and China reached an all-time high in

2018, when a hostile trade war erupted in both the economic and political sectors At thetime, the US declared an increase in tariffs on commodities imported from China;nevertheless, China did not surrender when it "devalued" its yuan to encourage goods

exports This is the reason for the disparity in the two countries' trade balances.

Figure: Chinese Economy Hit Hard by Coronavirus Outbreak

(Source: National Bureau of Statistics of China)

Then, by the end of 2019, following the advent of the COVID-19 pandemic, whichproduced a big disruption in economic activity, we could be in for a severe and extendedrecession lasting more than two years, with considerable economic disruptions TheNational Bureau of Statistics of China recently released a study showing a 13.5% loss inindustrial output and a 20.5 percent drop in retail sales Meanwhile, due to socialdistancing measures designed to limit the spread of the virus, fixed asset investment fell

by 24.5 percent across the country

Figure: View China's Exchange Rate against USD from 2017 to 2022

(Source: ceicdata.com)

In 2021, severe competition in many domains, including security, economy,commerce, technology, diplomacy, and sensitive issues like Taiwan, Hong Kong,Xinjiang, and the South China Sea, will be a key feature in US-China relations Theglobal economy is approaching a difficult 2022 after a robust comeback last year Lastyear, a crucial growth driver, export activity, fell The World Bank has decreased China'sGDP prediction for 2022 from 5.4 percent to 5.1 percent, following a strong cyclicalrecovery of 8% in 2022

China is currently defined by the US as "the greatest geopolitical challenge of thetwenty-first century," and "the most serious opponent," with economic, diplomatic,military, and technological might, ambition, and toughness, challenging the US and itsallies' position and strategic interests Washington must fight hard to prevent Beijing fromgaining an advantage, while Beijing is confident in its own strength, believing that Chinawill eventually overtake the US As a result, rivalry and confrontation between the twogreat powers are unavoidable

3.2 THE APPLICATIONS OF IRP AND IFE IN MARKET-BASEDFORECASTING METHOD

The implementation of IFE and IRP is critical when utilizing the market-basedforecasting method, specifically: