Weekly Assignment # 4 FIN 321

Weekly Assignment # 4 FIN 321 - Chapter 7 Questions 1 Term...

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Chapter 7 Questions: 1. Term Forecasting. What are the major differences between short-term and long-term Long-run forecasts may be motivated by a multinational firm's desire to initiate a foreign investment in Japan, or perhaps to raise long-term funds denominated in Japanese yen. Or a portfolio manager may be considering diversifying for the long term in Japanese securities. The longer the time horizon of the forecast, the more inaccurate but also the less critical the forecast is likely to be. The forecaster will typically use annual data to display long-run trends in such economic fundamentals as Japanese inflation, growth, and the BOP. a. Fixed exchange rate: * Fundamental analysis * BOP management * Ability to control domestic inflation * Ability to generate hard currency reserves to use for intervention * Ability to run trade surpluses b. Floating exchange rate: * Focus on inflationary fundamentals and PPP * Indicators of general economic health such as economic growth and stability * Technical analysis of long-term trends; new research indicates possibility of long-term technical “waves” Short-term forecasts are typically motivated by a desire to hedge a receivable, payable, or dividend for perhaps a period of three months. In this case the long-run economic fundamentals may not be as important as technical factors in the marketplace, government intervention, news, and passing whims of traders and investors. Accuracy of the forecast is critical since most of the exchange rate changes are relatively small even though the day-to-day volatility may be high. a. Fixed exchange rate: * Assume the fixed rate is maintained * Indications of stress on fixed rate? * Capital controls; black market rates * Indicators of Government's capability to maintain fixed-rate? * Changes in official foreign currency reserves b. Floating exchange rate: * Technical methods which capture trend * Forward rates as forecasts (a) < 30 days, assume a random walk (b) 30–90 days, forward rates * 90–360 days, combine trend with fundamental analysis * Fundamental analysis of inflationary concerns * Government declarations and agreements regarding exchange rate goals
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* Cooperative agreements with other countries 4. Asset Market Approach to Forecasting. Explain how the asset market approach can be used to forecast future spot exchange rates. How does the asset market approach differ from the BOP approach to forecasting? The asset market approach assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations or drivers. These drivers include the following: a. Relative real interest rates are a major consideration for investors in foreign bonds and short-term money market instruments. b. Prospects for economic growth and profitability are an important determinant
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This note was uploaded on 01/25/2011 for the course FIN 320 taught by Professor Mercury during the Fall '10 term at Central Connecticut State University.

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Weekly Assignment # 4 FIN 321 - Chapter 7 Questions 1 Term...

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