Kamrul Hassan PhD (Curtin, WA), AFHEA

This study examines the possibility of using widely known implied volatility (IV), realized volatility (RV) and GARCH volatility (GV) as input for Merton (1973) version Black-Scholes (1973) (M-BS) options pricing model. Since the construction method, information obtaining procedure, information containing characteristic and prediction capability of IV, RV, GV are distinct, the purpose of this study is to analyse which volatility information content is appropriate for pricing currency options correctly and which one incorporate relevant market information for the accurate currency options price forecast. The accuracy of options price is crucial for managing financial risk, speculative purposes and preventing the abnormal arbitrage profit.

Countries in the Middle East and Africa (MEA) have diverse economic structures. Some countries are oil exporters, some are oil importers and some countries are very poor dependent on agriculture. Since current account is an important indicator of an economy‟s health, it is of interest to examine if current account balances in MEA region are sustainable. However, empirical research paid scant attention to this issue. No study has been conducted before to examine this issue. The present paper makes an attempt to fill this research gap by employing panel data model over the period from 1995 to 2014 to examine current account sustainability in MEA countries. We follow intertemporal budget constraint approach and examine long-run relationship between export and import plus interest on net foreign debt. As we work with panel data, we pay special attention to cross-section dependence. We use annual data collected from World Development Indicators. All data (exports, imports and interest on long-term external borrowing) are in current US dollar and expressed as percentage of GDP. Interest payment on long-term external borrowing (also in current US dollar) is used as a proxy for interest on net foreign debt. Panel unit root test to cross-section dependence indicate variables are first-difference stationary. We next use panel cointegration and bootstrap critical values under null hypothesis to accommodate cross-section dependence. Panel cointegration result suggests that current account is sustainable. However, panel cointegrating regression estimation indicates that the value of sustainability coefficient is less than 1 (one), which implies that current account is weakly sustainable. As current account is weakly sustainable, it is desirable to make policy intervention at macro level to ensure strong sustainability. This may be achieved by accelerating ongoing trade reforms in MEA countries to boost export earnings and hence ensure the ability of external debt in the long run.

This paper investigates the sustainability of Malaysia’s current account balance for the period 1970 – 2010. In the framework of inter-temporal budget constraint the paper seeks to understand the behaviour of exports and imports of Malaysian economy. Autoregressive Distributed Lag (ARDL) bounds tests approach proposed by Pesaran et al. (2001) is applied to examine the long cointegrating relation between Malaysian exports and imports plus interest on external borrowing and it is found that these two variables are cointegrated. This implies that Malaysia’s current account is sustainable in the long run. However, as the long-run coefficient is greater than, it is concluded that the current account is weakly sustainable. This findings call for policy intervention at macro level to make efficient utilization of excess saving to boost economic growth.

This paper employs a panel based error correction approach to examine the short-and long-run dynamics of the current account sustainability in four ASEAN countries (Indonesia, Malaysia, the Philippines, and Thailand) over the period 1970 - 2010. The empirical findings indicate that exports and imports in these countries are cointegrated. The short-run deviation of this cointegrating relationship is significant and takes slightly less than four years to return to the long-run equilibrium path. This finding reinforces the notion that the current account balance is the outcome of optimal decisions of the lenders and borrowers, and any intervention to correct it is unwarranted. This finding also provides evidence against the claim that the Asian financial crisis was the outcome of an unsustainable current account deficit.

This paper finds the predictive power of currency smirk to forecast foreign exchange (FX) return to be convincing. Although the steeper currency smirk appears in the middle of the trading day, the conclusive currency smirks' predictability lasts over the next trading day, as the FX market is highly adept at incorporating the information embedded in the currency smirk. The implication of these fmdings is that the currency smirk is distinctive for forecasting very short-term FX fluctuations, and that day- or overnight FX traders can apply its uniqueness to profit from quick price swings in the 24-hour globalFX market.