Political safety is exceptionally important to both foreign portfolio and

Political safety is exceptionally important to both

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Political safety is exceptionally important to both foreign portfolio and direct investors. The outlook for political safety is usually reflected in political risk premiums for a country’s securities and for purposes of evaluating foreign direct investment in that country. The credibility of corporate governance practices is important to cross-border portfolio investors. A firm’s poor corporate governance practices can reduce foreign investors’ influence and cause subsequent loss of the firm’s focus on shareholder wealth objectives. Contagion is defined as the spread of a crisis in one country to its neighboring countries and other countries that have similar characteristics—at least in the eyes of cross-border investors. Contagion can cause an “innocent” country to experience capital flight with a resulting depreciation of its currency. Speculation can both cause a foreign exchange crisis or make an existing crisis worse. We will observe this effect through the three illustrative cases that follow shortly.
Chapter 10 Foreign Exchange Rate Determination and Forecasting 43 10-5. Technical Analysis. Explain how technical analysis can be used to forecast future spot exchange rates. How does technical analysis differ from the BOP and asset market approaches to forecasting? Technical analysts, traditionally referred to as chartists, focus on price and volume data to determine past trends that are expected to continue into the future. The single most important element of technical analysis is that future exchange rates are based on the current exchange rate. Exchange rate movements, similar to equity price movements, can be subdivided into three periods: (1) day- to-day movement, which is seemingly random; (2) short-term movements extending from several days to trends lasting several months; (3) long-term movements, which are characterized by up and down long-term trends. Long-term technical analysis has gained new popularity as a result of recent research into the possibility that long-term “waves” in currency movements exist under floating exchange rates. 10-6. Forecasting Services. Numerous exchange rate forecasting services exist. Trident’s CFO Maria Gonzalez is considering whether to subscribe to one of these services at a cost of $20,000 per year. The price includes online access to the forecasting services’ computerized econometric exchange rate prediction model. What factors should Maria consider when deciding whether or not to subscribe? If nothing else, a variety of opinions is generally useful when attempting to predict the future. Most forecasting services also provide added discipline to the forecasting process often missing within smaller corporate finance units. For example, the need to focus on the likely movement of an exchange rate within a specific time interval is typically stressed within a forecasting unit while not within a business unit’s planning horizon. A treasurer might also use a forecasting service because “it exists.” If the treasurer does not use it, and guesses wrong on an exchange

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