forcasting and exchange rate for different country currency price rate

1. S.K. School of Business Management
H.N.G.U , Patan
Presented To :
Prof. Parth Modi sir
Asst. Professor
S.K. School of Business Management,
HNGU Patan
Presnting By :
Name Roll No
Chovatiya Jaydeep 06
Modasiya Mohammed Faiz 22
Pankhaniya Nikunj 33
Chudasma Shivam 07

2. MNCs need exchange rate forecasts for their
 Hedging Decisions
 Short-term Financing Decisions
 Short-term Investment Decisions
 Capital Budgeting Decisions
 Long-term Financing Decisions
 Earnings Assessment

3.  MNCs constantly face the decision of whether to hedge
future payables and receivables in foreign currencies.
 Whether a firm hedges may be determined by its
forecasts of foreign currency values.
Hedging Decision

4. Short-term Financing Decision
• When large corporations borrow, they have access to
several different currencies.
• The currency they borrow will ideally exhibit:
1) A low interest rate and
2) weaken in value over the financing period.

5. Short-term Investment Decision
• Corporations sometimes have a substantial amount of
excess cash available for a short time period.
• The ideal currency they deposits ideally exhibit:
1) A high interest rate and
2) strengthen in value over the investment period.

6. Capital Budgeting Decision
When an MNC’s parent assesses whether to invest funds in a
foreign project, the firm takes into account that:
• The project may periodically require the exchange of
currencies.
• Analysis can be completed only when all estimated cash flows
• are measured in the parent’s local currency.

7. Earnings Assessment
• The parent’s decision about whether a foreign subsidiary:
• Reinvest earnings in a foreign country or Remit earnings back to
the parent.
• Decision may be influenced by exchange rate forecasts.
• If a strong foreign currency is expected to weaken substantially,
the parent may prefer to expedite the remittance earnings before
the foreign currency weakens.
• When earnings of an MNC are reported, subsidiary earnings are
consolidated and translated into the currency representing the
parent firm’s home country.

8.  Corporations that issue bonds to secure long-term
funds may prefer that the currency borrowed,
depreciate over time against the currency they are
receiving from sales.
 To estimate the cost of issuing bonds denominated in
a foreign currency, forecasts of exchange rates are
required.

9. Source: Prasant Chandra International Financial
Management 3rd edition

10. Forecasting Techniques
Numerous methods available for forecasting exchange rates can
be categorized into four general groups:
1. Technical Forecasting
2. Fundamental Forecasting
3. Market Based Forecasting
4. Mixed Forecasting

11. Technical Forecasting
Technical forecasting involves the use of historical exchange
rate data to predict future values.
• There may be a trend of successive exchange rate adjustments
in the same direction.
• It includes statistical analysis and time series models.
• Speculators may find the models useful for predicting day-to-
day movements.

12. Fundamental Forecasting
• Fundamental forecasting is based on fundamental
relationships between economic variables & exchange rates.
• A forecast may arise simply from a subjective assessment of
the factors that affect exchange rates.
• Changes in a currency’s spot rate is influenced by the
following factors:
Re=bo+b1I+b2Y+µ

13.  The process of developing forecasts from market indicators, is
usually based on either;
1. Spot rate or
2. Forward rate.
 Speculation should push the rates to the level that reflect the
market expectation of the future exchange rate.
 Corporations can use the spot rate to forecast since it represents
the market’s expectation of the spot rate in the near future.

14.  Mixed forecasting refers to the use of combination of
forecasting techniques
 The actual forecast is a weighted average of the various
forecasts developed

15.  If the forecast errors are consistently positive or negative
over time then there is a bias in the forecasting procedure.
 The following regression can be use to test for forecast
bias:
= a0+a1+forecast+µ
 If a predictor is found to be biased, the estimated a0 and
a1 values can be used to correct the systematic error

16. Thank You