An Empirical Analysis of the Relationship between Currency Futures and Currency, Exchange Rate, Economical Formulas, Prediction Models and Volatility in India with Reference to US Dollar, Great Britain Pound and Euro Currency

One of the largest financial markets in the world is the “global foreign exchange market” with average daily trades in trillions of dollars. The forex market is the backbone of international trade, global investing and is critical to support imports and exports. The exchange rate is one of the most important determinants of a country’s relative level of economic health. It is among the most watched, analysed and governmentally manipulated economic measures, since it impacts overall international trade. This study was aimed at identifying the important factors affecting valuation of the currency. The first approach was performing correlation analysis using historical data for 10 years for the period between 2007 and 2016 and the second was factor analysis using a data set of 100 banks professional’s responses using a survey towards valuation of currencies in the world. The key findings of the correlation analysis are that, money supply, Sensex, exports/imports and business confidence index are the main factors affecting the major currencies exchange rate. With the help of factor analysis it can be concluded that trade, domestic rates and remittances are the factors determining the price of domestic currency. Finally, the main factors that best predict the appreciation or depreciation of rupee are domestic index, investment inflow and money surplus. It is therefore recommended that by keeping some of these factors strong, we will have a healthy foreign exchange market which in turn leads to a profitable economy.