Lecture notes 2 IFM VK - Introduction Discussion and...

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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 International Financial Management II - 2017/S Lecture notes 2 - Measuring Exposure to Exchange Rates Fluctuations Maria Chiara Iannino 12th May 2017 IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Outline IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Today’s lecture I To discuss the relevance of an MNC”s exposure to exchange rate risk. I To explain how transaction exposure can be measured. I To explain how economic exposure can be measured. I To explain how translation exposure can be measured. Today’s Reading list: Madura and Fox, Chap. 10; Sercu, chap. 13 (-14). IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Exchange Rate Risk Management IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Outline IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Discussion questions 1. Which forecast technique would you use if you were hired by an MNC to forecast exchange rates? 2. Assume there is a regression model that was able to identify the factors which affected exchange rate movements in a recent four-year period. Also, suppose that the sensitivity of the exchange rate’s movements to each factor was precisely quantified. Is there any reason not to expect superior forecasting results from this method in the future? Elaborate. 3. What is the use of detecting a forecast bias? IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Q19. Probability Distribution of Forecasts Assume that the following regression model was applied to historical quarterly data: e t = a 0 + a 1 INT t + a 2 INF t - 1 + μ t where: I e t = percentage change in the exchange rate of the Japanese yen in period t I INT t = average real interest rate differential (U.S. interest rate minus Japanese interest rate) over period t I INF t - 1 = inflation differential (UK inflation rate minus Japanese inflation rate) in the previous period I a 0 , a 1 , a 2 = regression coefficients I μ t = error term. IFM VK
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Introduction Discussion and exercises from HW1 Types of Exposure Homework 2 Q19. Probability Distribution of Forecasts (2) Assume that the regression coefficients were estimated as follows: a 0 = 0.0; a 1 = 0.9; a 2 = 0.8. Also assume that the inflation differential in the most recent period was 3 %. The real interest rate differential in the upcoming period is forecasted as follows: Interest Rate Differential Probability 0% 30% 1 60 2 10 If Stillwater, Inc., uses this information to forecast the Japanese yen”s exchange rate, what will be the probability distribution of the yen”s percentage change over the upcoming period?
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