Term Paper

Of ACM 955 On

Relationship between Oil Prices and Indian Rupee-Us Dollar Exchange Rate
SUBMITTED TO: DR. SAURABH MANI DEPPT. OF APPLIED BUSINESS AND ECONOMICS SUBMITTED BY: ANURADHA AGARWAL M.PHIL 1ST SEM

DAYALBAGH EDUCATIONAL INSTITUTE (DEEMED UNIVERSITY) DAYALBAGH AGRA-282110

Crude Oil Prices The past few years have seen a surge into research pertaining to oil price, partially due to the recent increase in the price of this strategic commodity which plays vital roles in the global economy. Oil, one of the most traded commodities in the world, has observed numerous price fluctuations which have not only been associated with major world development but also believed as a trigger for economic inflation or recession. The rise in oil prices may affect the economy in a various ways particularly in the rise in the cost of production of goods and services, which in turn may affect the rate of inflation, consumer confidence, as well as financial markets. Exchange Rate In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency. For example, an interbank exchange rate of 91 Japanese yen (JPY, ) to the United States dollar (US$) means that 91 will be exchanged for each US$1 or that US$1 will be exchanged for each 91. Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers where currency trading is continuous: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. In the retail currency exchange market, a different buying rate and selling rate will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell the currency. The quoted rates will incorporate an allowance for a dealer's margin (or profit) in trading, or else the margin may be recovered in the form of a "commission" or in some other way. Different rates may also be quoted for cash (usually notes only), a documentary form (such as traveller's cheques) or electronically (such as a credit card purchase). The higher rate on documentary transactions is due to the additional time and cost of clearing the document, while

the cash is available for resale immediately. Some dealers on the other hand prefer documentary transactions because of the security concerns with cash. REGRESSION ANALYSIS It is a statistical method to measure the cause and effect relationship between dependent and independent variables and to predict the value of one variable on the basis of another variable.

TABLE1:RELATION BETWEEN OIL PRICES AND EXCHANGE RATE

Oil prices (X) Exchange Rate(Y)

YEAR 23.64 2008-09 20.82 2009-10 24.23 2010-11 32.29 2011-12 35.25 2012-13 136.23 TOTAL REGRESSION EQUATION FOR Y ON X: Y= Na + b X XY = a X + b X2 Putting values from the table 1 to equation 1 and 2, 237.81= 5a + 136.23b 6444.14= 136.23a + 3364.61b 237.81 43.81 48.34 45.68 46.6 53.38

X2 58.85 433.47 587.093 1042.64 1242.56 3364.61

Y2 2849.42 2171.56 2086.67 2336.75 1919.31 11363.7

XY 1261.9 970.21 1106.83 1560.9 1544.30 6444.14

(1) equation (2) equation

. (a) ..(b)

After solving these equation, we got value of a and b then the equation for Y on X is Y = 19.91+ 1.015X

Calculated value of Exchange rate through this equation for those 5 years YEAR 2008-09 2009-10 2010-11 2011-12 2012-13 For X on Y: X= Na + b Y XY = a Y + b Y2 Putting values from the table 1 to equation 3 and 4, 136.23 = 5a + 237.81b 6444.14 = 237.81a + 11363.7b .(c) (d) (3) equation (4) equation Projected Exchange Rate 43.90 46.6 41.042 45.68 44.5 48.34 56.68 43.81 55.69 Actual Exchange rate 53.38

After solving these equation, we got value of a and b then the equation for X= 58.860 + (-0.665) Y Calculated value of Oil Prices through this equation for those 5 years YEAR 2008-09 2009-10 2010-11 2011-12 2012-13 Predicted Oil Prices 23.36 20.82 27.871 24.23 28.483 32.29 26.714 35.25 29.73 Actual Oil Prices(X) 23.64

Both the equation are able to predict very near to the actual value of variables.