Relationship between stock prices and rupee rate w.r.

t
dollar in Pakistan: case study to KSE 100 index
Introduction:

Due to globalization the world has become a global village and size of international
trade has grown very swiftly. Due to this the need of foreign currencies such as dollar
has considerably been increased to make international transactions for goods and
services as well as for a stable exchange rate. Many factors, such as enterprise
performance, dividends, stock prices of other countries, gross domestic product,
exchange rates, interest rates, current account, money supply, employment, their
information etc. have an impact on daily stock prices. Beside this the relation
between stock returns and exchange rates has recently triggers the minds of
economists, for theoretical and empirical reasons, since they both play important
roles in influencing stock prices. Moreover, the continuing increases in the world trade
and capital movements have made the exchange rates as one of the main
determinants of business profitability and stock prices. Changes in the rupee rate w.r.t
dollar directly influence the international competitiveness of firms operating in
Pakistan, given their impact on input and output price. Basically, foreign exchange
rate volatility influences the value of the firm since the future cash flows of the firm
change with the fluctuations in the foreign exchange rates. Most of the international
firms directly faces the risk of exchange rate due to its operation in different countries
and receivables and payments in foreign currency. To eliminate the risk most firms
trade in standard foreign currency i.e. Dollar. So the change in exchange rate of
Pakistani rupee and dollar rate has direct impact on profitability of the firms which
ultimately affects the stock prices. Impact of rupee rate to dollar varies according the
nature of the business. From the exporting point of view such companies sell product to
outside world and receive payment in foreign currency (be it dollar). Whenever rupee appreciates as
compared to these currencies, companies are exposed to translation loss as they can buy fewer rupees
with same amount of foreign currency. This translation loss hurts their profitability since the raw material
cost is in terms of rupees which ultimately affects their stock prices. Similarly, companys profitability
increases in case of rupee depreciation. On the other hand, those companies who buys or imports raw

material of finished goods from outside the country makes payments in foreign currency. Whenever rupee
appreciates they are able to buy more foreign currency for payment resulting in overall translation gain.
Profitability of companies increases in this case and similarly, profitability decreases when rupee
depreciates When the Exchange rate appreciates, since exporters will lose their

competitiveness in international market, the sales and profits of exporters will shrink
and the stock prices will decline. On the other hand, importers will increase their
competitiveness in domestic markets. Therefore, their profit and stock prices will
increase. The depreciation of exchange rate will make adverse effects on exporters
and importers. Exporters will have advantage against other countries exporters and
increase their sales and their stock prices will be higher. That is, currency
appreciation has both a negative and a positive effect on the domestic stock market
for an export-dominant and an import-dominated country, respectively

In this study we will examine the effect of rupee rate with respect to dollar on the stock prices of
Pakistani firms. For this purpose those companies will be selected whose stocks are listed on KSE 100 and the
exchange selected will be Karachi stock exchange KSE-100 index. The Karachi stock market is one of

the leading emerging markets. There are 659 companies listed in the Karachi stock
exchange (KSE) with a total market capitalization of about $ 34.7 million, amounting
to 25 percent of the GDP in Pakistan.
In study we will examine the following things:

Impact of dollar rate on stock prices

Relationship between stock prices and rupee-dollar rate
Impact of stability and fluctuation of rupee-dollar rate of stock prices

The study will be descriptive study and will be based on secondary data obtained from various sites on the
internet. Most of the data will be obtained from the official sites and journals and articles. The study will find the
impact of exchange rates fluctuation of last five years on the stock prices of Pakistani firms.