Description
In this doc we have studied the relation between fluctuations in exchange rates and share prices of IT industry and petroleum based products industry.
Econometric Modelling
Formulation of Econometric model on the basis of relation between exchange rates and share prices
Introduction:
In this assignment I have studied the relation between fluctuations in exchange rates and share prices of IT industry and petroleum based products industry. Here IT industry represents the export oriented industries which tend to benefit by increasing exchange rates and the petroleum industry represents the import based industries which benefit by decreasing exchange rates.
Theoretical Basis:
The logical reasoning I used is as follows: For any export oriented industry, as the exchange rates increase, i.e. rupee depreciates, for same amount of exports the company earns more in terms of rupees. This translates in increasing profits. As profits increase the share prices increase. For an import oriented industry, as the exchange rates increase, i.e. rupee depreciates, for the same amount of imports the company has to pay more. As cost of inputs increases, the profits decrease and the share prices decrease. For companies with high level of overseas borrowings I also looked for some news items or reports suggesting any similar link. I have cited a few news items/ reports ahead. ‘Since the beginning of the year the Rupee has appreciated by just over 7 per cent against the Dollar, from 48 at the beginning of January to 45.88 on 12th August on the back of surging foreign exchange reserves, which are nudging the $85 billion mark. While exporters are beginning to complain, the cheaper Dollar, which still dominates India’s foreign trade, should have made a lot of imports, such as petroleum products, cars, PCs and cellular phones, cheaper.’ – Business Line ‘New Delhi, Oct. 3 Fluctuating crude oil prices and currency (rupee) depreciation continue to put financial pressure on public sector oil refinery-cum-marketing company Indian Oil Corporation Ltd (IOC). The company’s crude oil import bill this fiscal is likely to rise 17.6 per cent. “This fiscal the bill will be about $40 billion,” Mr Sarthak Behuria, Chairman IOC, told reporters here. The company would import 46-47 million tonne of crude oil this fiscal. “For every one rupee depreciation against the dollar, Rs 300 crore is added to our oil import cost,” he said adding that “the impact till now is Rs 1,200 crore.” ‘ – Hindu On the basis of above reasoning the following Null hypotheses were formulated. H0: There exists a direct relation between exchange rates and share prices of IT industry (export oriented)
H0: There exists an inverse relation between exchange rates and share prices of petroleum industry (import oriented)
Analysis:
To test the above hypothesis I selected three Petroleum companies and four IT companies. The results of the study are summarized below. EXCH_RATE Company estimate ESSAR HPCL IOCL INFOSYS SATYAM WIPRO TCS
T stat -1.399 -0.29 -10.75 28.2 4.371 13.677 20.57 -3.43 -0.099 -2.17 1.67 0.9975 1.99 0.655
prob of excg rate F statistic 0.0009 0.019 0.9211 0.9435 0.032 0.114 0.0962 0.112 0.32 0.3514 0.049 0.069 0.5189 0.479
The sign of the t-statistic substantiates the hypothesis stated above. For all the petroleum companies, the t-statistic value is negative, indicating an inverse relation. As exchange rates increase, rupee depreciates and the share prices fall. For all IT companies the t- statistic value is positive, indicating a direct relation. However the f statistic value is varying to a large extent. This indicates the effect of other factors like interest rates, the amount of foreign investment required, economic growth rate of India and that of exporting/importing countries etc.
Reasoning:
In this section we shall explore the reasons for the existence of a relation between exchange rates and share prices and also the reasons for lack of conclusive evidence. The exchange rates affect the share prices of companies in different ways. The effects of varying exchange rates are as follows: ? ? The basic reasons remain the cheaper imports and costlier exports. However there are a few more links between the exchange rates and share prices. For industries which involve massive overseas borrowings, INR appreciation is welcome. Significant levels of foreign currency – denominated, especially USD-denominated loans generate forex gains because of reduced interest payout occasioned by the rising INR. Investing money in India becomes lucrative for overseas investors if INR appreciates. This instils confidence in the minds of investor and also improves market sentiment. INR depreciation increases competitive advantage. If INR depreciates with respect to a competitor country like Chinese Yen, Indian goods become cheaper. This favours Indian exporters.
? ?
The above points help us understand the reason for the linkage.
But there are many other factors that affect the share prices. They are: ? ? ? ? For export oriented companies, the relative exchange rates movements of INR with other exporting countries also affect the share prices. Government restrictions or duties or tax exemptions The growth rate of the economy Interest rates etc.
As we have not accounted for all these factors the model is not significant. Also we have considered only the exchange rates with USD and not with all the countries with which there are export relations. However the –ve sign of all import oriented firms and +ve for all export oriented firms helps us conclude that rupee appreciation favours import oriented firms and goes against export oriented firms.
doc_126940626.docx
In this doc we have studied the relation between fluctuations in exchange rates and share prices of IT industry and petroleum based products industry.
Econometric Modelling
Formulation of Econometric model on the basis of relation between exchange rates and share prices
Introduction:
In this assignment I have studied the relation between fluctuations in exchange rates and share prices of IT industry and petroleum based products industry. Here IT industry represents the export oriented industries which tend to benefit by increasing exchange rates and the petroleum industry represents the import based industries which benefit by decreasing exchange rates.
Theoretical Basis:
The logical reasoning I used is as follows: For any export oriented industry, as the exchange rates increase, i.e. rupee depreciates, for same amount of exports the company earns more in terms of rupees. This translates in increasing profits. As profits increase the share prices increase. For an import oriented industry, as the exchange rates increase, i.e. rupee depreciates, for the same amount of imports the company has to pay more. As cost of inputs increases, the profits decrease and the share prices decrease. For companies with high level of overseas borrowings I also looked for some news items or reports suggesting any similar link. I have cited a few news items/ reports ahead. ‘Since the beginning of the year the Rupee has appreciated by just over 7 per cent against the Dollar, from 48 at the beginning of January to 45.88 on 12th August on the back of surging foreign exchange reserves, which are nudging the $85 billion mark. While exporters are beginning to complain, the cheaper Dollar, which still dominates India’s foreign trade, should have made a lot of imports, such as petroleum products, cars, PCs and cellular phones, cheaper.’ – Business Line ‘New Delhi, Oct. 3 Fluctuating crude oil prices and currency (rupee) depreciation continue to put financial pressure on public sector oil refinery-cum-marketing company Indian Oil Corporation Ltd (IOC). The company’s crude oil import bill this fiscal is likely to rise 17.6 per cent. “This fiscal the bill will be about $40 billion,” Mr Sarthak Behuria, Chairman IOC, told reporters here. The company would import 46-47 million tonne of crude oil this fiscal. “For every one rupee depreciation against the dollar, Rs 300 crore is added to our oil import cost,” he said adding that “the impact till now is Rs 1,200 crore.” ‘ – Hindu On the basis of above reasoning the following Null hypotheses were formulated. H0: There exists a direct relation between exchange rates and share prices of IT industry (export oriented)
H0: There exists an inverse relation between exchange rates and share prices of petroleum industry (import oriented)
Analysis:
To test the above hypothesis I selected three Petroleum companies and four IT companies. The results of the study are summarized below. EXCH_RATE Company estimate ESSAR HPCL IOCL INFOSYS SATYAM WIPRO TCS
T stat -1.399 -0.29 -10.75 28.2 4.371 13.677 20.57 -3.43 -0.099 -2.17 1.67 0.9975 1.99 0.655
prob of excg rate F statistic 0.0009 0.019 0.9211 0.9435 0.032 0.114 0.0962 0.112 0.32 0.3514 0.049 0.069 0.5189 0.479
The sign of the t-statistic substantiates the hypothesis stated above. For all the petroleum companies, the t-statistic value is negative, indicating an inverse relation. As exchange rates increase, rupee depreciates and the share prices fall. For all IT companies the t- statistic value is positive, indicating a direct relation. However the f statistic value is varying to a large extent. This indicates the effect of other factors like interest rates, the amount of foreign investment required, economic growth rate of India and that of exporting/importing countries etc.
Reasoning:
In this section we shall explore the reasons for the existence of a relation between exchange rates and share prices and also the reasons for lack of conclusive evidence. The exchange rates affect the share prices of companies in different ways. The effects of varying exchange rates are as follows: ? ? The basic reasons remain the cheaper imports and costlier exports. However there are a few more links between the exchange rates and share prices. For industries which involve massive overseas borrowings, INR appreciation is welcome. Significant levels of foreign currency – denominated, especially USD-denominated loans generate forex gains because of reduced interest payout occasioned by the rising INR. Investing money in India becomes lucrative for overseas investors if INR appreciates. This instils confidence in the minds of investor and also improves market sentiment. INR depreciation increases competitive advantage. If INR depreciates with respect to a competitor country like Chinese Yen, Indian goods become cheaper. This favours Indian exporters.
? ?
The above points help us understand the reason for the linkage.
But there are many other factors that affect the share prices. They are: ? ? ? ? For export oriented companies, the relative exchange rates movements of INR with other exporting countries also affect the share prices. Government restrictions or duties or tax exemptions The growth rate of the economy Interest rates etc.
As we have not accounted for all these factors the model is not significant. Also we have considered only the exchange rates with USD and not with all the countries with which there are export relations. However the –ve sign of all import oriented firms and +ve for all export oriented firms helps us conclude that rupee appreciation favours import oriented firms and goes against export oriented firms.
doc_126940626.docx