Value of Foreign Assets and Denominated Of Foreign Currencies Impact of Exchange Rate Movement

Abstract
Research has numerous importances in the field of business finance. In every business fields research is very impotent. Research will remove all the ambiguities concerning financing and investing. Exchange rate has influence on many factors like money supply, interest rate, inflation rate and many others macro factors can be cause. Understand the dynamics of net foreign assets and changing the face value of foreign currencies affect on exchange rate. Denominated of foreign currency and foreign assets value play a very important role in fluctuations of exchange rate. Face value changes of any currency that positive and negative impact on exchange rate. For example dollar, euro, yen etc value decrease and increase that impact on exchange rate. In previous year Pakistani currency value is more fluctuate as compared to other currencies. Currency crises of any country practice large movement in real exchange rate. Results shows effect of foreign assets value on exchange rate can be positive and denominated of foreign currencies on exchange rate movement was tested showing negative relationship. Tests were conducted based on changing of foreign assets value and face value of pounds. Key Words: Fluctuations in exchange rate, foreign assets value, Denominated of currency, Valuation effect,

Introduction
Exchange rate movement can be affected by number of factors; one is foreign assets value and second is changes in foreign currency value. In previous year Pakistani currency value is more fluctuate as compared to other currencies. Different countries foreign assets and denominated of foreign currency can play a very important role movement in exchange rate in Pakistan. Before discussing causal relationship of exchange rate with foreign assets value and denominated of foreign currency value there is need to explain what does exchange rate means Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another .There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country. Also called rate of exchange or foreign exchange rate or currency exchange rate.

LITERATURE REVIEW:
(Olivier et al, 2004) To understand the dynamics of net foreign assets and exchange rate movements, Capital gains and losses on net foreign assets prepare up an important path for outside conversion. In paper exemplify, a depreciation of the domestic currency improves the sustainability of a Country is outside position by decreasing the value of its liabilities to foreigners. Net foreign asset portfolio returns also affect the exchange rate. (Joseph 1996) Foreign assets and balance of exchange can be determinate different ways. Also see foreign assets affect on exchange rate. Also see the author different affects first; exchange rate is stronger affects when the exchange rate is defined in conditions of extensive prices. Second, the real exchange rate is between two and three years. Third, there is a major and tough relationship between real exchange rates and net foreign assets. (Ugo marani 1999)Exchange rate can be affects if foreign currency devaluation. Author can be clearing up in different points. In article author apply the different equation. Relation between economic policy and the value of the exchange rate also can be

examined. The growth of the outdoor value of money depends, in opinion, on the links between the full domestic attitudes of economic rule. (Drine et al, 2004) Deliberate on the two main questions what are the main resources of movement in exchange rate in residential countries. Monetary policy makers face possible real exchange rate fluctuations. (Masahir et al, 2000)The East Asian currency crisis for the exchange rate activities in the emerging market economies. In particular, it focuses on the worldwide roles of the US dollar, the Japanese yen, and the euro in the emerging East Asian economies exchange rate policies. (Cdric 2003). Effects from currency actions improve or decline the U.S. net location depends on them exchange rate coverage of the gross assets and gross liabilities. (Cavallo et al, 2005).Currency crises are usually linked with large invented and real depreciations. Currency crises in the 1990s and create that countries entering a crisis with high levels of foreign obligation tend to knowledge large real exchange rate fluctuate. (R. Lane et al, 2002) the net foreign asset place, the trade balance and the real exchange rate can be examined. The impact of a country's net foreign asset on its long-run real exchange rate into two mechanisms: the relation between external wealth and the trade balance; and, share other determinants fixed a relation between the trade balance and the real exchange rate. (Faruqee 1994)Long-run determinants of the real exchange rate from a stock flow perception. The examination estimates a long-run relationship between the real exchange rate and net foreign assets. Using data for the United States and Japan, analysis supports the finding that each country's net trade and net foreign asset positions determine the long-run path for the real value of the dollar and the yen. (Ans et al, 2006)Currency devaluation, real wages, could generate additional space that would help meet. Answer some question like what would be the short-term fiscal

gain of nominal exchange rate devaluation? Second is what would be the public cost linked with a devaluation of the Djibouti? What would be the net monetary gain of nominal exchange rate devaluation? (Chen et al, 2008)Chinese Yuan has been fluctuating about its long run balance value with undervaluation up to 4% and Overvaluation up to 6% at a range of points in time since 1997. These results conclusion of many of the most recent studies methodologies to determine the balance exchange rate. While the Yuan actual valuable exchange rate has deviated from stability. (Shi et al, 2008)Develops a small open economy model with close prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market. Exchange rate changes will lead to instability in both inflation and production cost. Exchange rate can be changed due to foreign assets value. (P. Dooley et al, 1988) Determinants of the currency of foreign exchange rate for both industrial and developing countries. During the period from 1976-85, our results indicate that the currency composition of reserves has been influenced by each country's exchange rate arrangements. (R. Lane et al, 2009) Exchange rate used to understand the impact of currency movements and that our currency method have high for the judgment term in net foreign asset dynamics. That many developing countries have reduced their negative foreign Currency positions over the last decade. (Karim et al, 2008)Different exchange rates have been in Bangladesh a fixed exchange rate from January 1972 May 2003 and a floating exchange rate since June 2003. Since the change in the value of Bangladesh currency Taka has fall by more than 20% against the US Dollar during a time. When the US Dollar itself has been down value. Analyze the exchange rate change in Bangladesh has had any important force on the value of its money. The study contributes if face value change of any foreign currency exchange rate can be changed.

(Ishfaq et al, 2010)The relationship between stock return, interest rate and exchange rates in Pakistani nation. Both the change in interest rate and change in exchange rate has a major impact on stock returns. (Hong Qiao 2005)East Asian economies, especially China, should be a different exchange rate policy. East Asian trading adjusts their exchange rate policies. Exchange rate changes when foreign exchange debts and assets are coming. The current account movement any exchange rate changes. Except for the case when a defaulter economy depreciates its currency against the dollar and suffers a foreign exchange crisis that the economy. (W.Ickes 2004).Exchange rates fluctuate as sharply. Current value of the exchange rate depends on expectations about future values. Adjustment in the asset and goods markets is very important to control exchange rate. (Cathy L. Jabara 2009).Exchange rate changes affect the prices of imported good or assets. Exchange-rate was also estimated for U.S. import prices from China for a small number of observations from mid-2005 to 2008, the period when the Yuan fluctuated against the dollar. (Luiz et al, 2008)Exchange rate and its determinants for a example of non-financial Brazilian companies from 1996 to 2006. Results show that more than 25% of the firms in the sample have exchange rate contact. Moved a fixed to a floating exchange rate rule were focused by changes in companies foreign currency borrowing. (Filippo di Mauro, et al 2008)See the Link between exchange rates and prices. Decline in exchange rate go through for the euro part. So that changes affect of exchange rate and trade flows. Exchange rate, its aim is to provide that why Pakistani currency is more sensitive and devalue quickly in exchange with other currency specially US dollar. (Alexis et al, 2008) Examine the channels throughout which oil prices affect the dollar exchange rate, find out that the relation among the two variables is transmitted during the U.S. net foreign asset position.

(Mirjana 2009)A market depend exchange rate can be change at any time the principles of also of two components currencies change. A currency tends to be converted into more important at what time always the demand for it is greater than the available supply. It becomes less expensive each time the order is a reduced amount of than available supply. (Romi 2004)Focuses on the risks linked with the utilize of foreign direct investments (FDI) by investors in microfinance. Among the a lot of risks concerned in such investments, currency and exchange rate fluctuations are major uncertain blocks declining private investment in microfinance institutions in less developed countries.

PROBLEM AREA:
Foreign assets value and changing the face value of foreign currencies affect on exchange rate movement. Positive or negative movement of exchange rate due to value of foreign asset and denominated of foreign currency.

OBJECTIVE OF RESEARCH:
To identify the relationship between the value of foreign assets and denomination of foreign currency with movements of exchange rates. Positive or negative movement of exchange rate due to value of foreign asset and denominated of foreign currency.

METHODOLOGY:
Model

Value of foreign Assets Movement in exchange rate Denominated of foreign currency

Model justification Understand the dynamics of net foreign assets and exchange rate movements. Impact of exchange rate movements on the value of U.S. foreign assets. Because a substantial amount of U.S. assets are denominated in foreign currencies, a depreciation of the dollar leads to large capital gains. (Cdric Tille 2005) Variable justification and Hypothesis Value of net foreign assets Pierre-Olivier Gourinchas and Helene Rey 2004 see the impact of exchange movement due to changing the net foreign assets value. Foreign assets value change so positive effect of exchange rate. Net foreign assets contain information about future portfolio returns and possibly future exchange rate changes. Romi Bhatia 2004 Net foreign assets as direct foreign investment can be the cause in movement in exchange. Many risks involve in such investments, currency and exchange rate fluctuations. Denominated of foreign currency Philip R. Lane and Jay C. Shambaugh 2009 see the currency movements are an significant provider to capital gains and losses on foreign assets and liabilities, the aim of project is to gain a better observed perceptive of the worldwide financial impact of shifts in exchange rates. Hypothesis Ho: Denominated of foreign currency negative relationship with exchange rate. H1: Value of foreign assets positive relationship with exchange rate. Sample and data Collection By using past 20 years data as sample from 1990 to 2009 data is collected. Data collection includes exchange rate against dollar, foreign assets value and face value of pounds previous 20 years.

Time Series Analysis

E.R
90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

E.R

The above graph shows the discrepancy in exchange rate against US dollar. With the passage of time exchange rate continuously move upward, showing regular depriciation in Pakistani currency against dollar. Regular appriciation in dollar represents expected rise in exchange rate.

F oreig asset value n

6000 5000 4000 3000 2000 1000 0
19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

Foreign asset value

The above time series graph shows number & amount of foreign assets value in Pakistan. Over a phase of 15 years (from 1990-2004) there is very small amount of foreign assets value, which all of a sudden goes to peak in between 2004-2007.

D enom inated of foreig currency n

60 50 40 30 20 10 0 199019921994199619982000 2002200420062008 Denom inated of foreign currency

The above time series analysis graph shows changing face value of pound over the period of twenty years. This graph reveales relationship of denominated of foreign currency.Face value of pound increase 1990-1992 and then decrease .

Data Analysis
Descriptive Statistics Variable E.R Foreign N 20 20 Mean Median 47.83 51.58 1324 528 28.40 26.50 Min 21.71 204 17.00 Max 81.71 5335 55.00 TR Mean 47.40 1164 27.56 Q1 30.84 322 20.00 StDev 17.19 1640 10.55 Q3 60.13 1371 33.50 SE Mean 3.84 367 2.36

Denominated 20 Variable E.R Foreign Denominated

The above descriptive analysis shows average mean of all variables i.e. exchange rate prices have 20 years average mean of 47.83 million, same is the case with foreign assets value is 1324 and face value of pounds is 28.40. Median represents the centre value of data collection where as standard deviation shows degree of deviation for example

degree of deviation in exchange rate is 17.19 which is too high, same is the case with foreign assets value 1640 and denominated of foreign currency 10.55. The next table shows the minimum & greatest value in collected historical data, also presents upper & lower quartile (25% & 75%). Correlations (Pearson) E.R Foreign Denominated 0.645 -0.905 -0.582 Foreign

Pearson correlation analysis reveals that a change of 1 rupee in foreign assets value will bring a change of 0.645 in exchange rate. Same correlation exist between denominated of foreign currency &exchange rate, a change of 1 rupee in face value of foreign currency will bring a change of -0.905 in exchange rate. There is also correlation exists between denominated of foreign currency and foreign assets value, denominated of foreign currency will change foreign assets value up to -0.582 times. Regression Analysis The regression equation is E.R = 82.4 + 0.00188 Foreign asset value (M) - 1.31 Denominated of foreign currency Predictor Constant Foreign S = 7.252 Coef 82.435 0.001875 R-Sq = 84.1% StDev 6.801 0.001247 0.1939 T 1.50 P 0.151

12.12 0.000 -6.74 0.000

Denominated -1.3059

R-Sq (adj) = 82.2%

Analysis of Variance Source Foreign DF 1 Seq SS 2336.7 2386.0

Denominated 1

Unusual Observations

Obs Foreign 20 3695

E.R 81.71

Fit StDev Fit Residual St Resid 67.16 2.94 14.55 2.19R

R denotes an observation with a large standardized residual Durbin-Watson statistic = 0.60 The above regression equation represents that bi-variate regression analysis is used. Table shows the coefficient of change which is positive for constant. Constant has highest value of coefficient of change; it brings larger change in foreign assets value as compared to denominate of foreign currency. Standard deviation shows the scatterdness of data around the regression line which is less in foreign assets value. On the other hand variation of data in constant value is much greater, showing inconsistency of data. Value of T represents the level of influence exerted denominated of foreign currency value and foreign assets value. Value of P represents the level of significance (fitness of data) which is also high in foreign assets value with the percentage of 15.1. Value of R represents the relationship between exchange rate, foreign assets value denominated of foreign currency, R square represents that overall 84.1% relationship exists between all variables or it can be said that denominated of foreign currency & foreign assets value will collectively bring 84.1% change in exchange rate. Adjusted R square represents that there is 82.2% exact relationship exists between foreign assets value, exchange rate and face value of foreign currency without errors. This further shows that there is 1.9% error exists in relationship. Analysis of Variance (ANOVA) Source Regression Error Total DF 2 17 19 SS 4722.7 894.0 5616.7 MS 52.6 F P 2361.4 44.90 0.000

This table mainly tells about variance, and also tells that up to which extent data is fit (i.e. check fitness of data). The ANOVA table represents in the column of degree of freedom, the total number of independent variables in regression analysis that is 2 & the next is remaining or error term which calculated by the formula N-k-1, where as N is total number of observations (that is 20) & K means number of independent variables in regression analysis (that is 2), In the next column it shows the sum of squares in regression & residuals (error). Mean square is calculated by dividing the value of sum of squares by the values of degree of freedom, it will also give mean but in square form. Further value of F represents the fitness (goodness) of model by showing value of 44.90, where as P shows high level of significance representing fitness of data acceptability of null hypothesis.

Conclusion

The factors that influence exchange rate. Two independent variables foreign assets value and denominated of foreign currency can be cause fluctuation in exchange rate. If face value of foreign currency can be changed then negative impact of exchange rate and foreign assets value change then positive impact of movement in exchange rate. Apply different test like descriptive statistics, regression analysis correlations (Pearson). Results of descriptive analysis shows average mean of all variables i.e. exchange rate prices have 20 years average mean of 47.83 million. Standard deviation shows degree of deviation for example degree of deviation in exchange rate is 17.19 which is too high, same is the case with foreign assets value 1640 and denominated of foreign currency 10.55. Pearson correlation analysis reveals that a change of 1 rupee in foreign assets value will bring a change of 0.645 in exchange rate. Correlation exists between denominated of foreign currency and foreign assets value, denominated of foreign currency will change foreign assets value up to -0.582 times. Regression equation represents that bi-variate regression analysis is used. Standard deviation shows the scatterdness of data around the regression line which is less in foreign assets value. Value of T represents the level of influence exerted denominated of foreign currency value and foreign assets value. P represents the level of significance (fitness of data) which is also high in foreign assets value with the percentage of 15.1. Value of R represents the relationship between exchange rate, foreign assets value denominated of foreign currency, R square represents that overall 84.1% relationship exists between all variables. Adjusted R square represents that there is 82.2% exact relationship exists between foreign assets value, exchange rate and face value of foreign currency without errors. This further shows that there is 1.9% error exists in relationship. Investigations shows if face of foreign currency can de changed so exchange rate fluctuate and also shows negative relationship with exchange rate. Foreign assets value also influence of exchange rate but shows positive relationship with exchange rate.

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Appendix

years 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

E.R 21.71 23.8 25.08 28.11 30.57 31.64 36.08 41.11 45.05 49.5 53.65 61.93 59.72 57.75 58.26 59.51 60.27 60.74 70.41 81.71

Foreign asset value 204 239 243 310 360 439 1106 700 572 428 473 286 483 771 906 1459 3450 5026 5335 3695

Denominated of foreign currency 55 49 41 37 34 32 31 29 28 27 26 24 22 21 20 20 19 18 18 17