relationship between oil price and exchange rate
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ACKNOWLEDGEMENT
First and foremost I offer my sincerest gratitude to my supervisor, Madam Zuraidah Redzuan,
who has supported me throughout my research project with her excellent guidance, patience
and knowledge whilst allowing me the room to work in my own way I attri!ute my research
project to her encouragement and effort and without her this project, too, would not have
!een completed or written "ne simply could not wish for a !etter or friendlier supervisor
I would like to express my deepest gratitude to my family, for they guidance, support, caring,
patience, and providing me with an excellent atmosphere to complete my research project
I gratefully appreciated and also like to thank especially my mother, to the rest of my families
and friends and a special thank you to, Zulhilmi #yader and Faai$a %yahirah, they were
always supporting me and encouraging me with their !est wishes and prayers
Finally, I would like to thank my !rother, %hiekh Rajjish &hmad #e always pray for me and
was always there cheering me up and stood !y me through the good times and !ad I am
inde!ted to him more than he knows
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ABSTRACT
'his work is intended to find out the relationship !etween "il (rice and )xchange
Rate 'he data that used to complete this research is the secondary data which it was o!tained
from the relia!le sources which is from the previous journal that are related in my study,
historical data on *rude "il (rice, historical data on )xchange Rate in Ringgit Malaysia
'ime series data from +anuary -- . -- /01 to 2ecem!er -0 . -0 /0 1 are used for all
varia!les in Malaysian country From the analysis of the data, that correlation !etween *rude
"il (rice and )xchange Rate for .3%24M5R1 and .M5R43%21 has high correlation, since
that !oth *rude "il (rice and )xchange Rates are volatile Means that !oth varia!le have
positive relationship For stationary test, all varia!les ."il *rude (rice, and )xchange Rate1
are stationary at 6 percent significant level 'his finding will contri!ute to Malaysian
government in making policies to strictly control the petrol price since that we know
)xchange Rates do affects the increase in *rude "il (rice
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CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
7etween -- to -0 , the price of crude oil has increased su!stantially in the world
market, especially in --8, --9 and --: For example, the ;est 'exas Intermediate .;'I,
a reference price used in the 3nited %tates and glo!ally1 increased from 3%
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higher oil prices directly means taking a !igger percent of their income for gasoline expenses
Moreover, the inflation that results from higher oil prices will reduce the monetary value and
adversely affect their expenditures and demand for goods and services "n the producers@
side, a higher oil price is associated with higher input price (roduction at higher cost will not
only cause reduction in $uantity of output produced !ut also push the price of output sold in
the market to !e higher 'he event of oil price increase and the pu!lics@ reaction to it has
raised an important $uestion of the impact of oil price on the economy
The increase of oil price will adversel a!ec"ed "o "he inves"or #eca$se of
in%a"ion& "he ra"e of in%a"ion is i'por"an" as i" represen"s "he ra"e a" which "he
real val$e of an inves"'en" is eroded and "he loss in spendin( power over "i'e)
*n%a"ion also "ells inves"ors e+ac"l how '$ch of a re"$rn "heir inves"'en"s need
"o 'a,e for "he' "o 'ain"ain "heir s"andard of livin() As in%a"ion hi""in( a
co$n"r & "he inves"ors need "o aware and have "o 'a,e a ri(h" decisions #efore
"hin( #eco'es worse)
"n the other hand, the perception that oil price spikes have a serious negative effect
on the economic as it effects the economic growth &kpieyi .0==91 noted that prices of oil
kept increasing !ecause the oil producing nations have raised the prices of crude oil &s the
prices of oil are also affected !y 3% 2ollar exchange rates, since the oil companies use 3%
2ollars to !uy oil from the world market 'he relationship !etween oil price and the
exchange rate of 3% dollar, from the financial press suggesting that a weak dollar has pushed
oil prices higher, oil prices rise if the dollar falls %ince oil is denominated in 3% dollars, a
weaker dollar might lead to an increase in the demand for oil in nonAdollar economies, which
would cause the oil price to rise In general, the increases in oil prices will give the !enefit to
the exporter where is the exporter can take the advantage of inflation and to the importer have
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no chance except to !uy or reduce their demand 'here is further argued that !oth the
exchange rate and oil prices might !e reacting to some other common factor "ne such factor
might !e monetary policy %ince oil is a stora!le commodity, it reacts not only to current !ut
also expected future monetary policy Bikewise, the exchange rate is also determined !y
current and expected monetary policy 'herefore, we should expect to see !oth oil prices and
exchange rates as jointly determined Increase in the oil prices is similar to a tax increase,
decreasing household disposa!le income will lead to a tighter monetary policy and have
higher interest rates with higher inflation and weaker economic growth
2epreciated ringgit has caused imported goods increased, when ringgit depreciate the
home currency !ecomes relatively cheaper for foreigners to !uy and foreign currency
!ecomes relatively more expensive to !uy and this directly will cause the imported goods
price increased If prices in !oth countries remain the same, depreciation will make foreign
goods relatively more expensive, leading to fall in imports It also means that even if prices
remain the same, goods will !e cheaper to foreigners 'hey will !uy more goods and exports
will rise &s a result, a country@s export will increase Figure 0 shows the trend of exchange
rate In Malaysia from -- to -0 'he figure depicts the fluctuation of exchange rate
happened in that period
CFigure 0/ Refer to &ppendixD
Figure shows the trend of oil price In Malaysia from -- to -0 'he figure depicts the
fluctuation of oil price happened in that period, it was recorded a drastic increase in --8,
--9 and --: 'he graph was fluctuate !ecause of Malaysian Eovernment decontrolled the
petrol price due to a huge !urden of the cost to the government
CFigure / Refer to &ppendixD
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1.2 PROBLEM STATEMENT
'oday the increase in the oil prices has grown throughout the years and it has caused
the pro!lem especially to the society 3ntil now increases in the price of oil have !ecome one
of the most crucial matters confronting society in general and industries and manufacturing
companies in particular
For example, there are several pro!lems happened in other countries especially in
India and *hina as there are the !iggest consumption of oil In India increases in the price of
oil since 2ecem!er --: !y Rs 6 a litre and that was the steepest increase on that year & part
of that, the increase in oil price has caused the increased to the price of goods !y almost Rs 9
when the government decontrolled the price in +un -0- "n May 06th, -00 the petrol price
was at Rs 8> >9 which was Rs 06 ?? higher than the petrol price on &pril 0, -0- India
always faced the increase in petrol price from -0- to -00 and this indirectly result the
unemployment amongst them
From issue a!ove, rising prices causes worsening poverty as the essentials for survival
!ecome more expensive and thus less attaina!le to those with low incomes In an economy
where unemployment and underemployment is increasing, family incomes are less a!le to
purchase the !asic re$uirements such as staple foodstuffs
'he arising in oil price is not just stop there, the cost of food also rises as well, partly
!ecause oil is used in many ways in growing and transporting food and partly !ecause of the
competition from !iofuels for land, sending land prices up 'he cost of shipping goods of all
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types rises, since oil is used in nearly all methods of transports 'he cost of materials that are
made from oil, such as asphalt and chemical products, also rises
In addition the arising in oil price also affected to a person, a person is re$uired to pay
more for oil, food, and delivered goods of all sorts, less will !e left over for discretionary
spending 7uying a new home is one such type of discretionary expenditure
;ith higher unemployment rates, governments are faced with paying more
unemployment !enefits and making more stimulus payments If there have !een many de!t
defaults !ecause of more unemployment or !ecause of falling home prices, the government
may also need to !ail out !anks &t the same time, taxes collected from citizens are lower,
!ecause of lower employment & major reason for today@s de!t pro!lems of the governments
of large oil importers, such as 3%, +apan, and much of )urope, is high oil prices )
Eovernments are also affected !y the high cost of replacing infrastructure that was
!uilt when oil prices were much lower For example, the cost of replacing asphalt roads is
much higher %o is the cost of replacing !ridges and !uried underground pipelines 'he only
way these costs can !e reduced is !y doing lessAgoing !ack to gravel roads
1.3 RESEARCH OBJECTIVE
'he o!jective of this study, I want to know the relationship !etween oil price and
exchange rate, hoping that I could gained knowledge throughout my study on this research
'he o!jective of this study is to o!serve the relationship !etween the oil price .in Malaysian
Ringgit, RM1 and exchange rate volatility in .RM per
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Furthermore, this study will !e use monthly from +anuary -- to 2ecem!er -0 , all the
data will !e used to see more accurate result since oil price is much fluctuated
1.4 RESEARCH QUESTION
*an exchange rate affects oil price
;hich exchange rate have more impact on oil price
Is exchange rate correlated to oil price
1.5 RESEARCH HYPOTHESIS
# o / )xchange rate will not affect oil price
# 0 / )xchange rate do affects oil price
# o / )xchange rate M5R43%2 have less impact on oil price
# / )xchange rate M5R43%2 have more impact on oil price
# o / )xchange rate is not correlated to oil price
# > / )xchange rate is correlated to oil price
1. SIGNIFICANT OF STUDY
'he !enefit that can !e assume to contri!ute to the society is the relationship !etween
oil price and exchange rate as !oth of these varia!le had an effect to the rise of oil price
!ecause of drop in dollar ;hen more studies have !een made the society can use this
research to !oost their knowledge a!out the relationship !etween oil price and exchange rate
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that causing the rise in oil price In addition, it can give them !etter understanding a!out the
rise of oil price that has caused the increased to the price of goods
'he !enefit to the researcher, this research will provide !etter understanding and !oost
their knowledge to other researchers to make another research in the future especially to those
who wants to analyze the effect of oil price to the exchange rate
In addition, this research may contri!ute to other investors to investigate that the spike
of oil price that causing loses to them so they can make a plan !efore it happens %trategic
planning are re$uired !efore making any investment
'he !enefit that can !e assume to contri!ute to the new knowledge is the relationship
!etween oil price and exchange rates volatility &s these two varia!le played an important
role 'his research main purpose is to o!serve the relationship !etween the oil price .in
Malaysian Ringgit, RM1 and exchange rate volatility in .RM per
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1.! ORGANISATION OF THE STUDY
'his study paper is categorized into five chapters, consisting Introduction .*hapter 01,
Biterature Review .*hapter 1, 2ata Methodology .*hapter >1, Results .*hapter ?1, and
*onclusion and Recommendation .*hapter 61 Introduction .*hapter 01 explains the synopsis
of overall study It also explains the significance of the study Biterature Review .*hapter 1
reviews a!out the relevant literature and theoretical framework )vidence from references are
provided as support to this study 2ata and Methodology .*hapter >1 discusses the setup and
design of study 'hen, the method of data collection is mentioned thus descri!ing the
methodology used to examine the data In results .*hapter ?1, finding are yielded and
analyzed Findings attained are then interpreted into results Bastly, conclusion and
recommendations .*hapter 61 will conclude the overall result constructed from this study
thus providing relevant recommendation for further research purposes
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CHAPTER 2
LITERATURE REVIEW
%ince oil prices and exchange rates !oth have experienced long swings after the
!reakdown of 7retton ;oods, the link !etween !oth varia!les has attached considera!le
interest from researchers & popular finding of the empirical literature is that real exchange
rates and real oil prices are cointegrated over the recent floating period In this vein, shocks
on real oil prices have !een identified as a possi!le explanation for nonAstationarity of real
exchange rates, *haudhuri and 2aniel, .0==:1 "ther studies have provided evidence that a
depreciation of the dollar triggers an increase in the price of oil, 5ousefi and ;irjanto,
. --?1
In a recent study, Re!oredo . -0 1 analyzes oil price and exchange rate coA
movements for different currencies and finds that an increase in oil prices and depreciations
against the dollar are weakly associated with two ways of causalities for different currencies
#e points out that such a relationship seems to !e stronger for oilAexporting countries
compared to oilAimporting countries *onsidering that different volatility and degree of coA
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movements !etween oil prices and exchange rates in the dollar can !e identified, it seems
important to allow for structural changes when analyzing the corresponding longArun
relationships, 7reitenfellner and *respo *uaresma, . --:1
Grugman, .0=:-1, Eolu!, .0=:>1 focuses on the !alance of payments, hence on the
trada!le sector and international portfolio choices & rise in oil prices is viewed as a wealth
transfer from oil importing countries to oilAexporting ones 'he impact on exchange rates
then depends on the distri!ution of oil imports across oil importing countries and on portfolio
preferences of !oth oilAimporting countries .whose wealth declines1 and oilAexporting ones
.whose wealth increases1 Grugman adds some dynamics in the model !y assuming that
"()* will progressively use their accumulated wealth to import more goods from industrial
countries #ence in the long run the real exchange rate will depend on the geographic
distri!ution of "()* imports, !ut no longer on "()* portfolio choices &ssuming that oilA
exporting countries have a strong preference for dollarAdenominated assets !ut not for 3%
goods, an oil price hike will lead the dollar to appreciate in the short run !ut not in the long
run
Following the study on the determination of the relationship !etween oil prices and
the 3% dollar, *oudert, . --:1 highlighted the importance of the 3% dollar as a reserve
currency and currency of choice for payment of oil transaction 'his implies that the rate of
exchange of the dollar to domestic currencies would affect the demand for oil 'hey posited
that dollar depreciation reduces the oil price in a domestic currency with floating exchange
rate, while the effect is neutral
In countries that are pegged to the 3% 2ollar 'hey concluded that the dollar
depreciation has a priori positive impact on oil demand and oil price "n the supply side, a
depreciation in the dollar would cause a decline in supply as the movement in the dollar
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would affect the cost of production that are priced in dollar through the rate of exchange of
the domestic currency to the dollar "n the impact of oil price on the dollar effective
exchange rate, they stated that a surge in oil prices tend to !oost producer countries wealth
and demand for dollar assets In addition, !ased on the !ehavioural e$uili!rium exchange
rate, oil prices influence termsAofAtrade, net foreign assets and, implicitly, impact on the
exchange rate *oudert, . --:1 found that the relationship !etween the two varia!les were
unclear and seem to depend on the period investigated In addition, the oil price varia!le
tends to lead the exchange rate varia!le, thus, the causality runs from the oil price to the
exchange rate 'hey concluded that speculation on oil price would lead to a speculation on
the dollar
'he de!ate on the influence of oil prices on the real exchange rate motivated Rautava
. --?1 to examine the relationship that exists !etween oil prices and real exchange rate in
Russia 'he study employed vector autoregressive .H&R1 modeling and cointegration
techni$ues to examine the impact of international oil prices and the real exchange rate on the
Russian economy and its fiscal policy 'he findings from the study indicate that the Russian
economy was influenced significantly !y fluctuations in oil prices and the real exchange rate
through !oth longArun e$uili!rium conditions and shortArun direct impacts #owever, !ecause
of growth trends in the Russian economy which improved in the recent times, the role of oil
prices have greatly reduced Rautava . --?1
*haudhuri and 2aniel find very similar results as &mano and van orden, *haudhuri
and 2aniel also use cointegration causality tests 'hey find that cointegration exists !etween
oil prices and exchange rates and that variation in the 3 % dollar real exchange rate are
caused !y variations in the real price of oil .*haudhuri and 2aniel, 0==:1
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%everal other papers arrive at the same conclusion !ut use different models For
example, &kram investigates whether a nonAlinear relationship exists !etween oil prices and
the orwegian exchange rate 'he author finds that fluctuations in oil prices do significantly
affect the orwegian exchange rate in a negative nonAlinear way, especially when oil prices
are !elow 0?3%2 &kra also uses an e$uili!rium corrections model that controls for other
factors that determine the orwegian exchange rate .&kram, --?1
CHAPTER 3
DATA AND METHODOLOGY
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SD456R
E7CHA89E RATE
:*8DEPE8DE8T;AR*A
56R4 SD
E7CHA89E RATE
:*8DEPE8DE8T;AR*A
CR DE O*= PR*CE *8 R*899*T5A=A6S*A
:DEPE8DE8T ;AR*A
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For this research, all the resources used is a secondary data which is important in
order to complete this research 'he secondary data was o!tained from the relia!le sources
which is from the previous journal that are related in my study, historical data on crude oil
price, historical data on exchange rate in Ringgit Malaysia
'he relationship !etween oil price in 3% dollar and exchange rate in Ringgit Malaysia
is the topic for this paper In this study will !e focus on three varia!le, the varia!le that exists
for this topic is the oil price in Ringgit Malaysia, exchange rate 3%24M5R and exchange rate
M5R43%2 'he oil price in Ringgit Malaysia is the dependent varia!le in this research
meanwhile the rest of the varia!le is the independent varia!le
"il price in Ringgit Malaysia is the dependent varia!le !ecause to determine the
causes if the independent varia!le affect dependent varia!le 'he independent varia!le has no
affect if there is changing in dependent varia!le 'he oil price in Ringgit Malaysia were used
as a measure in this experiment while independent varia!le will give the answer or respond to
the dependent varia!le
'he varia!les that used are the world crude oil price index .in Malaysian Ringgit,
RM1 which is can !e o!tained from .indexmundi com1 and exchange rate .RM per
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more than 0- years of oil price 'he price of oil are using 3% dollar in the world market as a
price of oil is per !arrel
¬her sources is needed to complete this study is exchange rates 'he historical of
exchange rates were o!tained from "anda com which provide for more than 0- years of
trend 'he exchange rate will !e used to determine if there is any relationship !etween oil
price and exchange rate in the spike oil price
F"#$%&' ("# C"##)&'*+",
;here J and 5 are the varia!les
'his is a measure related to R 2
# measures the strength and direction of the linear relationship !etween two varia!les/
# - 1 / the two varia!les are perfectly positively correlated
# - 0 1 / the two varia!les are perfectly negatively correlated
# - / the two varia!les are totally correlated
F"#$%&' ("# R 2
K )rro 'erm
K Independent Haria!le
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K &verage
C")((+ +),* "( ) ), ),* '#+'6&)
J K independent 5 K dependent
CHAPTER 4
RESULTS
ANALYSIS 7L)'8* S9%'#)8:
'he method of least s$uares is a standard approach to the approximate solution
of overde"er'ined s s"e's LBeast s$uaresL means that the overall solution minimizes
the sum of the s$uares of the errors made in the results of every single e$uation
Dependen" ;aria#le? O*=@PR*CE@R5
;aria#le Coe cien" S"d) Error "BS"a"is"ic Pro#)
56R@ SD .-33) /3 31 )32 1 )01/ 0)0000C B11-0)1 / 1) .03 B12)3 -11 0)0000
RBs $ared 0)/ 01/0 5ean dependen" var -1 ) 0.1Ad $s"ed RBs $ared 0)/ / S)D) dependen" var 1. )2.10S)E) of re(ression ) -// A,ai,e info cri"erion 11) 2 -
S$' s $ared resid 102 3 .) Schwar cri"erion 11) 3.2=o( li,elihood B ) / . HannanBF$inn cri"er) 11) - .GBs"a"is"ic 2 ). 0 D$r#inB a"son s"a" 0)1- / /
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Pro#:GBs"a"is"ic> 0)000000
M" )& E9%'*+",
"il (rice RM K A00?- 0=8- 6?>> =8>-M5R43%2 =0 ==6-e t
% ) .>0= > =91
tAstatistics C09 -08:NNND
R K - 8=- O 8= - P &djusted R K - 8:9:
'he explanatory varia!le accounted for a!out 8= - percent of the variation oil price model
)stimations reveal that the explanatory varia!le, namely the M5R43%2 .J1 was the
important explanatory varia!le with statistically significance at Q - -0 level in the oil price
model 'herefore, a 0 unit increase in the M5R43%2 .J1, on average, has the positive
relationship effect of increasing oil price .51 !y 6?>> =8>- units with statistically
significance at the Q - -0 level
DESCRIPTIVE ANALYSIS
O*=@PR*CE@R5 56R@ SD 5ean -1 ) 0.1 0)2 0/. 5edian -3.)/1 0)2 1100 5a+i'$' 10)021 0)33-/00 5ini'$' 13/).0 3 0)2/2.00 S"d) Dev) 1. )2.10 0)02-3- S,ewness 0)0/-20 0).23../ I$r"osis 2)1 /-0 1) / .2
Jar $eB
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*orrelation will !e computed using )views software *orrelation, r measures the strength and
direction of the linear relationship !etween two varia!les
O*=@PR*CE@R5 56R@ SD
O*=@PR*CE@R5 1)000000 0) 30 .56R@ SD 0) 30 . 1)000000
&fter running the data using )Hiews, correlation of oil price .RM1 to exchange rate
.M5R43%21 is - :>-: &ccording to Euild@s Ford@s Rule of 'hum!, value - :>-: lies
!etween - 9- till - =- indicating a high correlation
ANALYSIS 7L)'8* S9%'#)8:
'he method of least s$uares is a standard approach to the approximate solution
of overde"er'ined s s"e's LBeast s$uaresL means that the overall solution minimizes
the sum of the s$uares of the errors made in the results of every single e$uation
Dependen" ;aria#le? 6@O*=@PR*CE@R5
;aria#le Coe cien" S"d) Error "BS"a"is"ic Pro#)
SD@56R B-/3)/ 20 2.) 1 B1 ) . 32 0)0000C 20-0)0-/ 0).3..2 22).3310 0)0000
RBs $ared 0) 12 0 5ean dependen" var -1 ) 0.1Ad $s"ed RBs $ared 0) 10- S)D) dependen" var 1. )2.10S)E) of re(ression .)/ ./0 A,ai,e info cri"erion 11) .-2S$' s $ared resid .--/2) Schwar cri"erion 11) /=o( li,elihood B 3) 2/ HannanBF$inn cri"er) 11) 203GBs"a"is"ic 322).01- D$r#inB a"son s"a" 0)1. //2Pro#:GBs"a"is"ic> 0)000000
M" )& E9%'*+",
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"il (rice RM K -?- -?8 ?8> 8: -3%24M5R =- 6>66e t
tAstatistics CA09 =6:>NNND
R K - 90 9 O 90 9P &djusted R K - 90-6
'he explanatory varia!le accounted for a!out 90 9 percent of the variation oil price model
)stimations reveal that the explanatory varia!le, namely the 3%24M5R .J1 was the
important explanatory varia!le with statistically significance at Q - -0 level in the oil price
model 'herefore, a 0 unit increase in the 3%24M5R .J1, on average, has the negative
relationship effect of increasing oil price .51 !y ?8> 8: - units with statistically significance
at the Q - -0 level
DESCRIPTIVE ANALYSIS
6@O*=@PR*CE@R5 SD@56R 5ean -1 ) 0.1 3)- -.0 5edian -3.)/1 3).3/-00 5a+i'$' 10)021 3) 0-200 5ini'$' 13/).0 3 2) 00 S"d) Dev) 1. )2.10 0)2 -/ S,ewness 0)0/-20 B0)3/. 2 I$r"osis 2)1 /-0 1)/0.32
Jar $eB
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6@O*=@PR*CE@R5 1)000000 B0) --220SD@56R B0) --220 1)000000
&fter running the data using )Hiews, correlation of oil price .RM1 to exchange rate
.3%24M5R1 is - :?? &ccording to Euild@s Ford@s Rule of 'hum!, value - :?? lies
!etween - 9- till - =- indicating a high correlation
LINE GRAPH 7E;
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'he exchange rate is one of the determinants of the economy for countries It caused
no confidence among investors 'he Malaysian government fixed the exchange rate in 0==:
'he exchange rate was no longer determined !y the demand and supply In that time, the
currency was at RM> :-43%
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around RM> :- and dropped to RM> 08 in &pril --: &fter that, the exchange rate increased
to RM> 89 in March --= and decreased again to RM> -= in "cto!er -0- In &ugust -00,
the exchange rate was !elow RM> -- and the exchange rate rose to RM> 06 in 2ecem!er
-00
'he improving trend in the %ingaporean dollar and +apanese yen has continued 'he
3% dollar fell to its lowest mean of RM> 0 to a dollar in the second $uarter of --: !efore
recovering steadily to RM> 8 to a dollar in the first $uarter of --= and RM> 6 to a dollar
in the second $uarter <hough the trends are comforta!le, it is important for the Finance
Ministry to watch out for any signs of volatility to prevent the recurrence of the desta!ilizing
effects of 0==9
LINE GRAPH 7O+& P#+ ):
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'he graph shows the trend of oil price In Malaysia from -- to -0 'he figure
depicts the fluctuation of oil price happened in that period, it was recorded a drastic increase
from RM0 = to RM 9- in --: %tarted from 0 st ovem!er --:, the Malaysian
Eovernment decontrolled the petrol price due to a huge !urden of the cost to the government
;e could see the impact of the huge increase in petrol price on inflation in every goods and
services such as food and transportation & ational 7ank of Malaysia governor, 'an %ri 2r
Zeti &khtar &ziz said that 6P inflation was projected to happen due to the sharp rise in the
petrol price "n &ugust , --:, the government announced a decrease in fuel price !y : to
-P, started > &ugust --: "n %eptem!er ?, --:, the government alleviated a !urden of
Malaysian !y decreasing 0-P in accordance with a sharp decline in glo!al market %tarted
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from "cto!er 06, the price was adjusted again to a lower level !y 0-P and -P change
%u!stantially, on 0 ovem!er, the price kept decreasing !y 06P and even on ovem!er 0:
and 2ecem!er --: In -00, the fluctuation of oil price kept occurring where the increase
happened for four times 'he increase is very o!vious from +anuary to Mei 3ntil now the
issue of oil price never seems to end
Prices #e(an "o recover in earl 1 ) *n April& OPEC red$ced prod$c"ion
# ano"her 1) 1 'illion #arrels) As $s$al no" all of "he $o"as were o#served&
#$" #e"ween earl 1 and "he 'iddle of 1 OPEC prod$c"ion dropped #
a#o$" "hree 'illion #arrels per da ) The c$"s were s$ cien" "o 'ove prices a#ove
2. per #arrel)
i"h 'ini'al 62I pro#le's and (rowin( )S) and world econo'ies& "he
price con"in$ed "o rise "hro$(ho$" 2000 "o a pos" 1 1 hi(h) *n 2000 #e"ween
April and Oc"o#er& "hree s$ccessive OPEC $o"a increases "o"alin( 3)2 'illion
#arrels per da were no" a#le "o s"e' "he price increase) Prices Knall s"ar"ed
down followin( ano"her $o"a increase of .00&000 e!ec"ive 8ove'#er 1& 2000)
R$ssian prod$c"ion increases do'ina"ed nonBOPEC prod$c"ion (row"h fro'
2000 "o 200 and was responsi#le for 'os" of "he nonBOPEC increase since "he
"$rn of "he cen"$r )
Once a(ain i" appeared "ha" OPEC oversho" "he 'ar,) *n 2001& a
wea,ened S econo' and increases in nonBOPEC prod$c"ion p$" downward
press$re on prices) *n response OPEC once a(ain en"ered in"o a series of
red$c"ions in 'e'#er $o"as c$""in( 3). 'illion #arrels # Sep"e'#er 1& 2001) *n
"he a#sence of "he Sep"e'#er 11& 2001 "erroris" a""ac,s& "his wo$ld have #een
s$ cien" "o 'odera"e or even reverse "he downward "rend)
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*n "he wa,e of "he a""ac,& cr$de oil prices pl$''e"ed) Spo" prices for "he
)S) #ench'ar, es" Te+as *n"er'edia"e were down 3. percen" # "he 'iddle of
8ove'#er) nder nor'al circ$'s"ances a drop in price of "his 'a(ni"$de wo$ld
have res$l"ed in ano"her ro$nd of $o"a red$c"ions) 9iven "he poli"ical cli'a"e
OPEC dela ed addi"ional c$"s $n"il Jan$ar 2002) *" "hen red$ced i"s $o"a # 1).
'illion #arrels per da and was oined # several nonBOPEC prod$cers incl$din(
R$ssia which pro'ised co'#ined prod$c"ion c$"s of an addi"ional -/2&.00
#arrels) This had "he desired e!ec" wi"h oil prices 'ovin( in"o "he 2. ran(e #
5arch 2002) < 'id ear "he nonBOPEC 'e'#ers were res"orin( "heir prod$c"ion
c$"s #$" prices con"in$ed "o rise as )S) inven"ories reached a 20B ear low la"er
in "he ear)
< ear end overs$ppl was no" a pro#le') Pro#le's in ;ene $ela led "o a
s"ri,e a" PD;SA ca$sin( ;ene $elan prod$c"ion "o pl$''e") *n "he wa,e of "he
s"ri,e ;ene $ela was never a#le "o res"ore capaci" "o i"s previo$s level and is
s"ill a#o$" 00&000 #arrels per da #elow i"s pea, capaci" of 3). 'illion #arrels
per da ) OPEC increased $o"as # 2) 'illion #arrels per da in Jan$ar and
Ge#r$ar 2003
On 5arch 1 & 2003& $s" as so'e ;ene $elan prod$c"ion was #e(innin( "o
re"$rn& 'ili"ar ac"ion co''enced in *ra ) 5eanwhile& inven"ories re'ained low
in "he )S) and o"her OECD co$n"ries) i"h an i'provin( econo' )S) de'and
was increasin( and Asian de'and for cr$de oil was (rowin( a" a rapid pace)
The loss of prod$c"ion capaci" in *ra and ;ene $ela co'#ined wi"h
increased OPEC prod$c"ion "o 'ee" (rowin( in"erna"ional de'and led "o "he
erosion of e+cess oil prod$c"ion capaci" ) *n 'idB2002& "here were 'ore "han si+
'illion #arrels per da of e+cess prod$c"ion capaci" and # 'idB2003 "he e+cess
was #elow "wo 'illion) D$rin( '$ch of 200- and 200. "he spare capaci" "o
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prod$ce oil was less "han a 'illion #arrels per da ) A 'illion #arrels per da is no"
eno$(h spare capaci" "o cover an in"err$p"ion of s$ppl fro' 'os" OPEC
prod$cers)
*n a world "ha" cons$'es 'ore "han 0 'illion #arrels per da of
pe"role$' prod$c"s "ha" added a si(niKcan" ris, pre'i$' "o cr$de oil price and
was lar(el responsi#le for prices in e+cess of -0B .0 per #arrel)
O"her 'a or fac"ors con"ri#$"in( "o hi(her prices incl$ded a wea, dollar
and "he rapid (row"h in Asian econo'ies and "heir pe"role$' cons$'p"ion) The200. h$rricanes and )S) reKner pro#le's associa"ed wi"h "he conversion fro'
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Gollowin( an OPEC c$" of -)2 'illion #4d in Jan$ar 200 prices rose
s"eadil in "he s$ppor"ed # risin( de'and in Asia) *n la"e Ge#r$ar 2011& prices
$'ped as a conse $ence of "he loss of =i# an e+por"s in "he face of "he =i# an
civil war) Concern a#o$" addi"ional in"err$p"ions fro' $nres" in o"her 5iddle Eas"
and 8or"h African prod$cers con"in$es "o s$ppor" "he price while as of 5idB
Oc"o#er -00&000 #arrels per da of =i# an prod$c"ion was res"ored)
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CHAPTER 5
CONCLUSION AND RECOMMENDATION
5.1 CONCLUSION
*n concl$sion& "his research i'ple'en"ed is "o Knd o$" "he
rela"ionship #e"ween cr$de oil price and e+chan(e ra"e fro' Jan$ar 2002
$n"il Dece'#er 2012) The 5ala sia cr$de oil price nor'all has a
%$c"$a"ion fro' Jan$ar 200. $n"il Dece'#er 2011) However& "he cr$de
oil price has achieved a hi(her price in J$l 200 and dropped sharpl
d$rin( A$($s" 200 ) The e+chan(e ra"e also has a %$c"$a"ion fro' 'on"h
"o 'on"h s"ar"in( fro' Jan$ar 2002 "o Dece'#er 2012) Following the study
on the determination of the relationship !etween oil prices and the exchange rate
.3%24M5R1, we agree with *oudert, . --:1 highlighted the importance of the 3% dollar as a
reserve currency and currency of choice for payment of oil transaction 'his implies that the
rate of exchange of the dollar to domestic currencies would affect the demand for oil 'hey
posited that dollar depreciation reduces the oil price in a domestic currency with floating
exchange rate, while the effect is neutral From the analysis of the data, we found that
correlation !etween crude oil price and exchange rate for .3%24M5R1 and .M5R43%21 has
high correlation, since that !oth crude oil price and exchange rates are volatile Means that
!oth varia!le have positive relationship Research $uestions are well answer, exchange rate
do affects oil price For stationary test, all varia!les .oil crude price, and exchange rate1 are
stationary at 6 percent significant level 'his finding will contri!ute to Malaysian government
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in making policies to strictly control the petrol price since that we know exchange rates do
affects the increase in crude oil price 'he increase in crude oil prices are not good for the
country especially for citizens as it can !e a !urden to the people who have low income
%ince that the increased of oil price also will lead to the increase in other goods and services
5.2 RECOMMENDATION
Eovernment should !e aware in the increase of oil prices since that it will lead to the
increase of other goods and services
%ince that exchange rates do have positive relationship to the increase in oil price, the
government should monitor the fluctuation of exchange rate from time to time
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REFERENCES
&liyu, % 3 R . --=1 S Impact of Oil Price Shock and Exchange Rate Volatility on EconomicGrowth in Nigeria: An Empirical In e!tigation"# Research +ournal of International
%tudies
7olaji 7 ", (h 2 and 7olaji E &, (h 2 $In e!tigation the Effect! of Increa!e in Oil Price!
on %an&fact&ring 'ompanie! in Nigeria"# Research +ournal of International %tudies
#arri &, alley B, and #udson 2 . --=1 $(he Relation!hip )etween Oil* Exchange Rate!*
and 'ommodity Price!" +ournal of &gricultural and &pllied )conomics, ?0, /6-0
60- %outhern &gricultural )conomics &ssociation
7eckmann + and *zudaj R . -0 1 $Oil Price and +#S ,ollar Exchange Rate! ,ynamic!"
3niversity of 2uis!urgA)ssen
7enessyATuere &, Mignon H and (enot & . --61 $'hina and the Relation!hip )etween the
Oil Price and the ,ollar"
)nglama &, (h 2, 2uke " ", "gunleye ' % and Fatima 3mar Isma@il $Oil Price! and
Exchange Rate! Volatility in Nigeria: An Empirical In e!tigation" *entral 7ank of
igeria, )conomic and Financial Review Holume ?:4>
+ennifer * 2awson, $Oil Price! on Exchange Rate!: A 'a!e St&dy of the ,ominican
Rep&)lic" 'he (ark (lace )conomist, Holume JIH
2r Mahani Zainal &!idin, (rof 2r Rajjah Rasiah, $(he Glo)al -inancial 'ri!i! and the
%alay!ian Economy: Impact and Re!pon!e!" !y Institute of %trategic and
International %tudies .I%I%1 Malaysian, Faculty of )conomics and &dministration,3niversity Malaya .3M1, *ommissioned !y the 3nited ations 2evelopment
(rogramme .3 2(1
Gathleen G, &i 2, 2avid M . -0 1, $An Econometric Analy!i! of Oil Price %o ement: (he
Role of Political E ent! and Economic New!* -inancial (rading* and %arket
-&ndamental!"
2ale " . --=1 $.hat i! the Relation!hip )etween Exchange Rate and Oil Price!"#
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APPENDI>
Figure 0/ 'he 'rend of )xchange Rate In Malaysia from -- to -0
Figure / 'he 'rend of "il (rice in Malaysia from -- to -0
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OIL PRICE
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E>CHANGE RATE
RAW DATA
Da"e $sd4'r
' r4$sd
oil priceSD
oil priceR5
oil price SDchan(es
oil price 56Rchan(es
JanB02 3)2
0)2/30
3.) . 13/).1
Ge#B02
3)3
0)2/30
3 )- 1-2)2 -)23L -)23L
5arB02
3)/
0)2/30
--)3 1/ ). 1 )- L 1 )- L
AprB02 3)/
0)2/30
- ) - 1 1)30 )..L )..L
5a B02 3) / 0)2/3 0 - )2 1 3)0- 0) /L 0) /L
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J$nB02 3) --
0)2/2 -.) 1 -).0 B-). L B-)/ L
J$lB02 3) . 0)2/2 - )32 1 3)-2 .)0 L .)11L
A$(B02 3) 1 0)2/2 .0)22 1 0)/ 3) 3L 3) /LSepB
023) 0)2/3
0.3)0. 201)- .)/-L .)/.L
Oc"B02 3) 0)2/30
.1)/- 1 /)12 B2)//L B2)//L
8ovB02
3)2
0)2/30
-/)- 1 /).3 B ) L B ) L
DecB02
3) 0)2/30
.2)2 1 ).1 12)-3L 12)-.L
JanB03 3)3
0)2/30
. )/- 21 ) 3 10)2 L 10)2 L
Ge#B03
3) //
0)2/2 /1)/ 233) /) L /) 2L
5arB03
3)3
0)2/31
./) 3 21.) 0 B ) -L B ) 3L
AprB03 3) /3
0)2/32
- ) . 1 1)2 B1.) L B1/)00L
5a B03
3) 2 0)2/3.
- ) . 1 .)2- 2)30L 2)1 L
J$nB03 3) 0)2/30
.2)2/ 1 ).2 /) L )1 L
J$lB03 3)
3
0)2/3
0
.3). 203).. 2).-L 2).3L
A$(B03
3) 0)2/30
..)/3 211)3- 3) 1L 3) 3L
SepB03
3) /2
0)2/32
.0)-2 1 1)-0 B )3 L B )-3L
Oc"B03 3) 02-
0)2/2 .-)-1 20/) ) 1L )0 L
8ovB03
3)1
0)2/31
.-)/1 20 )-1 0)3 L 0)2.L
DecB03
3) /.
0)2/32
./)1- 213)1- 2) 0L 2) /L
JanB0- 3) 0-2
0)2/2 . ) - 223)-/ -)/3L -) -L
Ge#B0-
3) 0)2/30
. )/. 222) / B0)1.L B0)2 L
5arB0-
3) - 0)2/33
/3)02 23 )1. )-.L )31L
AprB0- 3) 00 0)2/2 /3)1/ 2-0)0/ 0)22L 0)3 L
5a B0-
3) 0)2/30
0)3 2/ )32 11)-2L 11)3/L
J$nB0- 3) 0)2/31
//)/- 2.3)0 B.)30L B.)33L
J$lB0- 3)3
0)2/30
0) / 2/ )/0 /)- L /).3L
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A$(B0-
3) / 0)2/32
) 3 2 )2 11)0 L 11)01L
SepB0-
3)-
0)2/31
) 3 2 .)2. B1)-0L B1)3.L
Oc"B0- 3) 1 0)2/3 1 )3 331) 12)-1L 12)-1L8ovB
0-3)
20)2/3
1)/1 2 ). B10)0-L B10)03L
DecB0-
3)/
0)2/32
3)02 2 )30 B )11L B )13L
JanB0. 3) - 0)2/2.
0)3 30.)03 10)0 L 10)00L
Ge#B0.
3)/
0)2/30
3)2 31/)13 3).1L 3)/-L
5arB0.
3) 0)2/31
.)3 3/2)30 1-)/3L 1-)/1L
AprB0. 3)-
0)2/31
-) - 3/0)/2 B0)-.L B0)-/L
5a B0.
3)-
0)2/30
) 1 3-0) - B.).1L B.)- L
J$nB0. 3) 0)2/31
101)1 3 -)0 12) 0L 12)/ L
J$lB0. 3)3
0)2/3 10.) 1 -00)3/ -)./L -)2-L
A$(B0.
3) ..
0)2//0
11.) -3.) / ) 1L ) -L
SepB
0.
3) / 0)2/.
3
11.). -3.)- B0)3-L B0)0/L
Oc"B0. 3) / 0)2/.1
10 )02 -10) B.)/ L B.)/2L
8ovB0.
3) --
0)2/- 103)1 3 )-- B.)3/L B.)2-L
DecB0.
3) /3
0)2/-/
10.) 3 3 )/. 2). L 2)/2L
JanB0/ 3) 2/
0)2/.0
11 )1 -3/)/2 10)/.L )2.L
Ge#B0/
3) 21 0)2/ 112)0 -1 )1 B-)2 L B-)-/L
5arB0/
3) 0)2/ 11-)32 -22) 1) L 1)3 L
AprB0/ 3)/.3 0)2 2.
12 )/ -//)12 11)/2L 10)20L
5a B0/
3). - 0)2 . 12 ) . -/3)20 0) L B0)/3L
J$nB0/ 3)/--
0)2 21
12 )1. -/ )-1 B0).-L 0) 1L
J$lB0/ 3)/./ 0)2 1 13.) - )20 /)10L /)3 L
A$(B0/
3)/-2-
0)2 1.
13-) 1 - 1)03 B0) .L B1)2-L
SepB0/
3)/./ 0)2 1/
11/)/2 -2/)- B13)- L B13)1.L
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Oc"B0/ 3)//. 0)2 0 10 ) 3 ) B/) 2L B/).0L
8ovB0/
3)/32/
0)2 3/
10 )22 3 /) . 0)-0L B0).0L
DecB0/ 3).-2 0)2 0 . 11-).2 -0.)/3 -) .L 2)2-L JanB0 3)-
-0)2 -
2100).2 3.1) / B12)22L B13)2 L
Ge#B0
3)- -1
0)2 .1
10 )0 3 /)./ ).2L )0.L
5arB0
3)- 0)2 .2
113) . 3 .) - .)3-L .)1.L
AprB0 3)-221
0)2-
122)2 -1 )-. )-0L .)/ L
5a B0
3)3 .3
0)2 22
122).2 -1-) 0)20L B0) L
J$nB0 3)-3/ 0)2 01
12 )0 --0)1 -).-L /)13L
J$lB0 3)-31-
0)2 00
13 )12 - 3) - ) -L )/ L
A$(B0
3)- /2
0)2 / 131)/3 -. ). B-) 0L B3)-.L
SepB0
3)-/3.
0)22
1--)0. - ) 2 )--L )0-L
Oc"B0 3)3/- 0)2 .-
1.3) - .1 )// /) 0L 3) /L
8ovB
0
3)3-
1
0)2 1 1)3 . 3) 11)-0L 10) L
DecB0
3)32 0)2 1/ )0. .. )-2 B1) -L B2).3L
JanB0 3)2///
0)30.1
1 0)2. ../)1- 1)31L B0). L
Ge#B0
3)222 0)30.
1 .)3- ./-) . 2) L 1). L
5arB0
3)1 01
0)313 1 1)1 /0.) 1 ) L )23L
AprB0 3)1/13
0)31. 20-)2- /-.)// /) L /). L
5a B0
3)20- 0)310 230).2 3 ) 12) L 1-)-2L
J$nB0 3)2.1 0)30/.
2- )01 03)20 )1.L ) 2L
J$lB0 3)2--.
0)300
2- )// 10)02 1)0 L 0) .L
A$(B0
3)320 0)300-
21.)3 1-) B13) /L B11) 3L
SepB0
3)-21
0)2 1 )0/ /-1)-. B13)12L B10)2 L
Oc"B0 3).10/
0)2 3.
13/)3- - )/- B2 )11L B2.)3 L
8ovB0
3). 0)2/
101)2- 3/2)22 B2.) -L B2-)32L
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DecB0
3).3- 0)2 10
) 1 2 -)/ B23)2-L B2-)1 L
JanB0 3).- 0)2 2). 2 3)1- /)2 L /) 2L
Ge#B0 3)/1- 0)2 .3 ) 3 2 -) . B-).-L B2) 0L5arB
03)//3 0)2 1
2) 322)02 11)- L 13)01L
AprB0 3)/0 0)2 //
-).. 3-1)22 ). L .) /L
5a B0
3).10 0)2 2/
10 )2 3 3)// 1.). L 12)--L
J$nB0 3).11.
0)2 3 12 ) -./)-/ 1 ) .L 1 ) L
J$lB0 3).31
0)2 12
121)/- -30)3 B/)-2L B.) 1L
A$(B0
3).01
0)2 3.
13-)/ - 2)/1 10) 2L ) 1L
SepB0
3)- 21
0)2 .1
12 )- -- )3. B-)/1L B.)3-L
Oc"B0 3)3 //
0)2 2 13 )21 - 2) - )3/L .) 0L
8ovB0
3)3 3.
0)2 -/
1-.) 2 - 3)3 -) .L -)3-L
DecB0
3)-00-
0)2 1 1-0) / - ) B3)-0L B2) 2L
JanB10 3)3/ 0)2 -
/
1--) . - )2 2) 0L 1) -L
Ge#B10
3)-0- 0)2 1 1-0)- - ) 2 B3)1-L B2)12L
5arB10
3)312 0)2.
1- ) - - 3)-2 /)0 L 3)2-L
AprB10 3)13
0)310.
1. )13 .0.) 1 /)1 L 2).3L
5a B10
3)2-2.
0)30/-
1-2)1. -/0) 2 B10)11L B ) L
J$nB10 3)2.1
0)30./
1-0)-. -. )/0 B1)20L B0) 2L
J$lB10 3)1 .2
0)310 13 ) / -- )20 B0)3.L B2)2 L
A$(B10
3)1-. 0)31/0
1-2). -- )3 1) /L 0)2/L
SepB10
3)0-
0)320 1-3)0 --3)32 0)3/L B1)13L
Oc"B10 3)0 0 0)321 1.3). - -)/ )33L )0 L
8ovB10
3)10.
0)3210
1. ) 1 - -)13 3)- L -)10L
DecB10
3)1203
0)31 1/ )33 .2 )3/ /)./L /) 3L
JanB11 3)0-/ 0)32.2
1 -)2 .30) 2) 2L 0).0L
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Ge#B11
3)0-0 0)32 1 -)1 .. ) 3 .)/3L .)-3L
5arB11
3)03- 0)320
20-)-2 /20)21 11)0-L 10) L
AprB11 3)0111
0)331.
21 ) 2 /. ) )0-L /)2-L
5a B11
3)003
0)331.
203)/2 /12) . B/) .L B )00L
J$nB11 3)0201
0)322
1 )3. /02)0/ B2)10L B1) .L
J$lB11 2) 0)333-
203)23 /0 )/2 1) .L 0) 2L
A$(B11
2) 0)33-/
1 ). ./-).0 B/) /L B )10L
SepB11
3)0/3/
0)32/0
1 0)2 . 2) 1 0)-1L 3)2/L
Oc"B11 3)13 . 0)31 / 1 )-- . 1)/1 B0) /L 1)- L
8ovB11
3)1-. 0)310
1 ).1 /2-)- .)3-L .)./L
DecB11
3)1.-1
0)31. 1 /)31 /1 )1 B1)11L B0) .L
JanB12 3)11/
0)3202
201)32 /2 )/- 2)..L 1)3 L
Ge#B12
3)0212
0)3303
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5arB12
3)033 0)321
222)03 / 3)-2 -).-L -) .L
AprB12 3)0..-
0)32/0
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5a B12
3)0 /-
0)3221
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J$nB12 3)1./
0)3131
1 1)02 .-0)01 B12) L B10) /L
J$lB12 3)1.22
0)31-0
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A$(B12
3)10 0)31 1 )-2 /1/)- ) .L )2 L
SepB
12
3)0 0
-
0)323 200)- /1.).. 1)0-L B0)1.L
Oc"B12 3)0-0.
0)32/0
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8ovB12
3)0-2 0)32.3
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DecB12
3)0-- 0)32/-
1 0) 1 . 0) B0)0/L 0)01L
RESEARCH PROJECT DRS 3023