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Forecasting foreign currency exchange rates for department of defense budgeting1

Nicholas R. Gardner (cost analyst with the US Air Force)
Jonathan D. Ritschel (Cost Analysis Graduate Program at the Air Force Institute of Technology)
Edward D. White (Chief Economist for the Secretary of the Air Force)
Andrew T. Wallen (Professor of Statistics at the Air Force Institute of Technology)

Journal of Public Procurement

ISSN: 1535-0118

Article publication date: 1 April 2017



This paper examines the opportunity cost of applying simple averages in formulating the Department of Defense (DoD) budget for foreign exchange rates. Using out-of-sample validation, we evaluate the status quo of a center-weighted average against a Random Walk model, ARIMA, forward rates, futures contracts, and a private firm's forecasts over two time periods extending from Fiscal Year (FY) 1991 to FY 2014. The results strongly indicate that four of the alternative methods outperform the status quo over the shorter time period, and three methods for both time periods. Furthermore, a non-parametric comparison of the median error demonstrates statistical similarities between the four alternative methods over the short term. Overall, the paper recommends using the futures option prices to decrease forecast error by 3.23% and avoiding a $34 million opportunity cost.


Gardner, N.R., Ritschel, J.D., White, E.D. and Wallen, A.T. (2017), "Forecasting foreign currency exchange rates for department of defense budgeting1", Journal of Public Procurement, Vol. 17 No. 3, pp. 315-336.



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