Notes Session 5 - Notes - Session 5 > Chapter 9:...

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Notes - Session 5 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Chapter 9: Forecasting Exchange Rates Chapter 10: Measuring Exposure to Exchange Rate Fluctuations >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> There are many reasons why a multinational firm needs to use exchange rate forecasts, including the need to minimize foreign exchange losses, the need to quote accurate prices in foreign currencies to customers and the need to select optimal international investments. Multinational firms are exposed to exchange rate losses through their existing and expected foreign currency- denominated accounts payables and receivables. In order to decide whether to use hedging strategies, the firm needs exchange rate forecasts. In order to quote a product price in a foreign currency, the multinational needs to estimate what exchange rate will be in effect at the time of sale and remittance. When multinationals make choices among international capital and portfolio investments, they need exchange rate forecasts extending out many years in order to make the correct decision. TECHNICAL AND FUNDAMENTAL ANALYSIS The primary methods used to forecast foreign exchange movements are technical analysis and fundamental analysis. Fundamental analysis use economic and financial theories to construct forecasts. (Much of your textbook to date has focused on fundamental analysis.) Some of the variables fundamental analysts consider in making their forecasts are balance of payments data, relative inflation and interest rates, purchasing power parity and so on. In contrast, technical analysts focus on price and volume data to determine past trends that they expect to continue into the future. Technical analysis of exchange movements resembles technical forecasting of stock prices. An important point to note in technical analysis is that future exchange rates are based current and past data, and that technical analysis assumes that price and volume patterns repeat. Unlike the theoretical approach taken by fundamental analysis, the time-series techniques used in technical analysis are not based upon theory or causality, but simply predict future values from the recent past. Fundamental analysts would argue that the past is not an accurate predictor of the future, because the environment changes. What do I mean? To use a simple example, a "technical approach" to forecasting retail store sales over the Christmas season would analyze past years of data and extrapolate trends which it would then use to forecast this year's sales. A
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Notes Session 5 - Notes - Session 5 > Chapter 9:...

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