“Amoateng Gut Check” approach to forecasting exchange rate using standard parity relationships

Abstract

This pedagogical paper demonstrates how “the Gut check approach” uses a made-simple technique for international corporate finance and economics students to forecast exchange rates using parity relationships. The “Gut-check approach” uses two simple steps. First, check out if the spot exchange rate is either direct or indirect. Second, review the parity relationships (purchasing power parity or interest rate parity) for the two currencies in question to find out which currency appreciate or depreciates. To this end, the paper provides historical review of the standard technique by many textbook authors. The “Amoateng Gut-check technique” yields similar but more precise foreign exchange rate forecasting results than the standard approach. Moreover, it provides international corporate finance and economics students who may not recognize foreign and home countries an easy way of exchange rate forecast.