Executive Summary

Introduction

Exchange rate is the price of one currency in terms of another currency. In Other Words, exchange
rate is also known as the purchasing power of one currency against another.

Exchange Rate Fluctuation is known as exchange rate volatility. Volatile exchange rates make
international trade and investment decisions more difficult because volatility increases exchange
rate risk. Exchange rate risk refers to the potential to lose money because of a change in the
exchange rate. Below are two quick examples of how traders and investors may lose money when
the exchange rate changes. Volatile exchange rates also create exchange rate risk for the
international investors. Fluctuating exchange rates make it more difficult for the investors to know
where to invest. One cannot merely look at what the interest rate in across countries, but must also
speculate about the exchange rate change. Make the wrong guess about the exchange rate
movement and one could lose a substantial amount of money.
 Literature Review

Utilizing the OLS methodology, favored the negative hypothesis Clark, 1973 as well as an
insignificant relationship between export quantity and volatility

(Hooper and Kohlagen, 1978)

Hoper and Kohl Hagen, 1978 investigated bilateral and multilateral trade among developed
countries using the standard error of nominal exchange rate fluctuations as their volatility measure.

Recent empirical studies have confirmed that exchange rate volatility has a negative effect on
exports, especially for developing economies

(Arize, 2000; Dognalar, 2002)

 Background of the Study

The sharp depreciation of Bangladesh Taka (BDT) against US dollar (US$) in late 2011 has
generated considerable interest in seeking the reasons behind the exchange rate fluctuations in
Bangladesh. The early stage of the floating exchange rate regime in Bangladesh was almost stable
with low volatility and minimal depreciation of the taka against major trading partners' currencies
due to adequate preparatory steps taken by Bangladesh Bank and the low inflationary environment
at home and internationally (Rahman and Barua, 2006). From June 2003 to July 2004 the
BDT/US$ exchange rate remained fairly stable while during August 2004 to April 2006 it
experienced substantial depreciating pressure. After April 2006, the exchange rate remained very
stable moving very gently during May 2006 to June 2010. The exchange rates again started to
depreciate sharply from July 2010 and it continued up to January 2012. From February 2012, it
recorded an appreciating tendency which is still continuing. It is generally believed that
depreciation of the domestic currency improves net exports as well as the external current account
balance of the home country. But the benefits depend on the elasticity of export and import demand
function of the country. Besides, it increases the country's rate of inflation through pass through
effect.
 Theoretical Development

Exchange rate:

Exchange rate measures the value of one currency in units of another currency.

Depreciate:

When a currency declines in value, it is said to depreciate.

Appreciate:

When a currency Increases in value, it is said to appreciate.

Relative Interest Rate:

Relative interest rates are directly related to a nation's real interest rate and can drastically affect
the direction and stability of a nation's economy.

Inflation:

Inflation is the rise of price level.

National Income:

National Income is the total amount of money that is earned within a country.

Government Restrictions:

A government may reduce its country’s imports by imposing tariffs on imported goods, or by
enforcing a quota.
 Objectives

There are primary and secondary objectives of this research. The primary objective is to know
about how exchange rate volatility occurs. Secondary objective is that to compare the average
between the exchange rates on US Dollar and Euro against Bangladeshi Taka.
 Methodology

This work is conducted based on analysis of past 3 year’s data of exchange rates. As well as use
of standard deviation. These analysis helps to complete the work.
Limitations
 Analysis and Interpretation

STANDARD DEVIATION OF 1 US DOLLAR

AGAINST TAKA
Year Standard Deviation

0.743

0.866

1.352

2018

2017

2016

Interpretation: In this Chart, we see that the Standard deviation of US Dollar in 2016 was 1.352,
in 2017 was 0.866 and in 2018 it was 0.743.
 STANDARD DEVIATION OF 1 EURO AGAINST TAKA

Year Standard Deviation

0.021

1.312
1.921

2018

2017
2016

Interpretation: this chart showing that the Standard deviation of Euro is 1.921 in the year 2016,
1.312 in 2017 and 0.021 in 2018.

Comparison: Comparing this two chart, it is clear that in 2016 and 2017 the SD is higher of Euro
than US dollar. It means the currency of Euro is more fluctuating than US dollar. But in 2018, US
Dollar slightly fluctuated than US Dollar.
 Findings

The main objective of this report was “Exchange rate volatility calculation and finding out the
reasons.” I have already finished my exchange rate volatility calculation and find that, the value
of taka against Euro is more fluctuating than the US Dollar.

There are some factors that are behind these fluctuations of the rates. These are:

Relative inflation rates: If the inflation is getting higher, the price level is increased and people
tend to shift towards foreign product. So, on that situation exchange rate of foreign currency will
be strong and home currency will be weaker.

Relative interest rates: Foreign bank deposit is decreased as higher interest rate provide higher
interest rate to investors. So, it causes appreciation in local currency.

National income level: If the national income level of a country increases at that time local people
wants to buy foreign product. So, it weakens home currency and also related to change in exchange
rates.
 Conclusion

This report task essentially deals about the exchange rate volatility and their reasons behind. That
calculation of SD approaches actually delivers me the basic knowledge about how to find out the
volatility of exchange rate.

This work will be helpful for me in the further work that is related to exchange rate volatility.
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