Forecasting Daily Spot Rate:Comparing Prediction Performance of Traditional Technical Methods

A reliable forecast of exchange rates is an essential informational input for decision making like management of foreign exchange exposure other financial decisions. There are a host of factors that determine the exchange rate of any currency and also there are a number of techniques to forecast exchange rate. The literature so far available suggests that no method has distinct superiority over others and exchange rate can be forecasted with more accuracy over longer time horizons in comparison to short term exchange rates. This study examined the forecast performance of traditional methods in forecasting daily spot rate. The study compared the non linear regression and exponential smoothing methods for the Indian Rupee (INR) US dollar exchange rate after testing the randomness of exchange rate. Data of daily exchange rate for one month was used to predict the exchange rate. The findings revealed that exponential smoothing performs exceptionally well in predicting daily spot exchange rates.