Currency Risk Management: Predicting the EUR/USD Exchange Rate

This project provides a simple, yet comprehensive approach to predicting movements in the exchange rate between the Euro and the U.S. Dollar through the development of a linear regression model and further fitting the errors by using momentum signals. The predictions generated are compared to the forward rates in order to develop a hedging strategy for deciding when to use a forward contract or wait to use the spot exchange rate. Finally, we analyze the payoffs obtained by using this strategy