Lecture 9 - Forecasting exchange rates. After completing this chapter, students will be able to: To explain how firms can benefit from forecasting exchange rates; to describe the common techniques used for forecasting; and to explain how forecasting performance can be evaluated. | Forecasting Exchange Rates 9 Lecture Chapter Objectives To explain how firms can benefit from forecasting exchange rates; To describe the common techniques used for forecasting; and To explain how forecasting performance can be evaluated. MNCs need exchange rate forecasts for their: hedging decisions, short-term financing decisions, short-term investment decisions, capital budgeting decisions, earnings assessments, and long-term financing decisions. Why Firms Forecast Exchange Rates Corporate Motives for Forecasting Exchange Rates Forecasting exchange rates 1QA\ Value of the firm 1QA\ Dollar cash flows Cost of capital Decide whether to obtain financing in foreign currencies Decide whether to hedge foreign currency cash flows Decide whether to invest in foreign projects Decide whether foreign subsidiaries should remit earnings Forecasting Techniques The numerous methods available for forecasting exchange rates can be categorized into four general groups: technical, fundamental, . | Forecasting Exchange Rates 9 Lecture Chapter Objectives To explain how firms can benefit from forecasting exchange rates; To describe the common techniques used for forecasting; and To explain how forecasting performance can be evaluated. MNCs need exchange rate forecasts for their: hedging decisions, short-term financing decisions, short-term investment decisions, capital budgeting decisions, earnings assessments, and long-term financing decisions. Why Firms Forecast Exchange Rates Corporate Motives for Forecasting Exchange Rates Forecasting exchange rates 1QA\ Value of the firm 1QA\ Dollar cash flows Cost of capital Decide whether to obtain financing in foreign currencies Decide whether to hedge foreign currency cash flows Decide whether to invest in foreign projects Decide whether foreign subsidiaries should remit earnings Forecasting Techniques The numerous methods available for forecasting exchange rates can be categorized into four general groups: technical, fundamental, market-based, and mixed. Technical forecasting involves the use of historical data to predict future values. . time series models. Speculators may find the models useful for predicting day-to-day movements. However, since the models typically focus on the near future and rarely provide point or range estimates, they are of limited use to MNCs. Technical Forecasting Fundamental forecasting is based on the fundamental relationships between economic variables and exchange rates. . subjective assessments, quantitative measurements based on regression models and sensitivity analyses. Note that the use of PPP to forecast future exchange rates is inadequate since PPP may not hold and future inflation rates are also uncertain. Fundamental Forecasting In general, fundamental forecasting is limited by: the uncertain timing of the impact of the factors, the need to forecast factors that have an immediate impact on exchange rates, the omission of factors that are not easily quantifiable, and .
