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Chapter 09 - CHAPTER 9 Forecasting Exchange Rates Chapter...

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Unformatted text preview: CHAPTER 9 Forecasting Exchange Rates Chapter Overview Chapter A. Why Firms Forecast Exchange Rates B. Forecast Techniques C. Exchange Rate Volatility Chapter 9 Objectives Chapter This chapter will: A. Explain how firms can benefit from forecasting exchange rates B. Describe the common techniques used for forecasting C. Explain how forecasting performance can be evaluated A. Why Firms Forecast Exchange Rates Rates Hedging Decisions Short­term Financing Decisions Short­term Investment Decisions Capital Budgeting Decisions Earnings Assessments Long­term financing Decisions B. Forecast Techniques B. 1. Technical Forecasting Limitations of Technical Forecasting 2. Fundamental Forecasting a. Use of Sensitivity Analysis for Fundamental Forecasting b. Use of PPP for Fundamental Forecasting c. Limitations of Fundamental Forecasting B. Forecast Techniques B. 3. Market­Based Forecasting a. Use of the Spot Rate b. Use of the Forward Rate c. Rationale for Using the Forward d. Long­Term Forecasting with the Forward Rates e. Implications of the IFE and IRP for Forecast Using the Forward Rate B. Forecast Techniques B. 4. Mixed Forecasting a. Since no one method has been found fool proof, a combination of forecasting techniques is used b. the techniques are assigned a weight that totals 100 points c. more reliable techniques assigned a higher weight C. Forecasting Services C. 1. Firms: • • • • Business International Conti Currency Predex Global Insight D. Forecast Error D. 1. Potential Impact of Forecast Errors 2. Measurement of Forecast Error 3. Forecast Accuracy over Time 4. Forecast Accuracy among Currencies 5. Forecast Bias a. Statistical Test of Forecast Bias 6. Graphic Evaluation of Forecast Performance D. Forecast Error D. 7. Comparisons of Forecasting Methods 8. Forecasting under Market Efficiency 9. Using Interval Forecasting D. Forecast Error D. 10. Methods of Forecasting Exchange Rate Volatility a. Use of the Recent Volatility Level b. Use of a Historical Pattern of Volatilities c. Implied Standard Deviation ...
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