WER plc is planning to negotiate bank overdraft facilities in the local currency to pay for supplies from India and South Africa. It will then periodically convert UK pounds to these currencies to keep within the overdraft limits.

WER sees no need to purchase derivatives or forward rates as the currencies will not be well correlated; a more expensive rupee will be offset by a cheaper rand and vice versa.

To check these assertions download five years’ GDPINR and GDPZAR daily exchange rates from the Bank of England website (search for ‘Bank of England currencies’ online or enter www.bankofengland.co.uk/boeapps/

database/Rates.asp?Travel=NIxAZx&into=GBP) and from the Excel spreadsheets calculate the daily movement of the exchange rate (remember that it is most recent first from the BoE). Calculate the daily correlation over a 30-day period ‘sliding window’ through the sample and a line graph of the result (refer to the Appendix B notes for ‘sliding window’). The output is a graph of daily correlations over the last five years. From this graph consider the actual degree of offsetting posed by paying in these two currencies.