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CH08sguide

# CH08sguide - 8 ChapterObjectives 1 To describe how exchange...

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Chapter Objectives 1. To describe how exchange rate changes are measured. 2. To explain why companies forecast exchange rates. 3. To explain why no one should pay for currency-forecasting services if foreign exchange markets are perfectly efficient. 4. To list and discuss the three techniques used for forecasting exchange rates in a floating-rate system: fundamental analysis, technical analysis, and market-based forecasts. 5. To discuss how companies can monitor their forecasting performance in a floating-rate system. 6. To identify a four-stage procedure for forecasting exchange rates in a fixed-rate system. Chapter Outline I. Measuring Exchange Rate Changes A. An exchange rate is the price of one currency expressed in terms of another currency. i. A decrease in the value of one currency relative to another currency is known as depreciation or devaluation. ii. An increase in the value of one currency relative to another currency is known as appreciation or valuation. Exchange Rate Forecasting      97 8 Exchange Rate Forecasting

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B. The percentage change in the value of a foreign currency relative to the home currency is computed as follows: Percentage change = ( 29 O O e e e - 1 where e 1 = ending exchange rate and e o = beginning exchange rate. C. The percentage change in the value of a home currency relative to a foreign currency is computed as follows: Percentage change = ( 29 1 1 e e e O - where e 1 = ending exchange rate and e o = beginning exchange rate. i. A positive change represents appreciation; a negative change represents depreciation. II. Forecasting Needs of the MNC A. MNCs have a variety of foreign-currency denominated payables, receivables, credit purchases, credit sales, and uncovered forward contracts. All of these expose MNCs to exchange rate risks and prod MNCs to hedge against these potential losses. B. Working capital management consists of short-term financing and short- term investment decisions. i. The value of the currency borrowed or invested will change with respect to the borrower’s or the investor’s local currency over time. ii. When MNCs borrow, they have access to a variety of sources in a variety of currencies. They should choose the one with a low interest rate and whose currency will depreciate over the life of the loan. 1. Additionally, large short-term loans should be spread across a number of different currencies. C. Long-term Investment Analysis and Financing Decisions i. An important feature of long-term investment analysis is that the projected cash flows depend partially on future exchange rates. ii. More accurate predictions of exchange rate movements will result in more accurate cash flow predictions and better company decision-making. 1. Investors should invest in a currency that will have a high rate of return and appreciate over the investment period.
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CH08sguide - 8 ChapterObjectives 1 To describe how exchange...

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