Fundamental Analysis
eddy14
fin565_ppt_ch09.ppt© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
International Financial Management 10th Edition
by Jeff Madura
*
*
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Forecasting Exchange Rates
Chapter Objectives
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
*
*
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Why Firms Forecast Exchange Rates
- Hedging decisions
- Short-term investment decisions
- Capital budgeting decisions
- Earnings assessment
- Long-term financing decisions
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Forecasting Techniques
- Technical Forecasting
- Fundamental Forecasting
- Market-Based Forecasting
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Technical Forecasting
- Involves the use of historical exchange rate data to predict future values
- Limitations of technical forecasting:
Focuses on the near future
Rarely provides point estimates or range of possible future values
Technical forecasting model that worked well in one period may not work well in another
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Fundamental Forecasting
- Based on fundamental relationships between economic variables and exchange rates
- Use of sensitivity analysis to account for uncertainty by considering more than one possible outcome.
- Use of PPP for fundamental analysis by forecasting inflation rate differentials
- Limitations of fundamental forecasting include:
Unknown timing of the impact of some factors
Forecasts of some factors may be difficult to obtain
Some factors are not easily quantified
Regression coefficients may not remain constant
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Market-Based Forecasting
- Use of the spot rate to forecast the future spot rate.
- Use of the forward rate to forecast the future spot rate
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Mixed Forecasting
- Use a a combination of forecasting techniques
- Mixed forecast is then a weighted average of the various forecasts developed
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Forecast Error
- Measurement of forecast error
Absolute forecast error as a percentage of the realized value = (forecasted value – realized value) / realized value
- Forecast error among time horizons
- Forecast error over time periods
- Forecast errors among currencies
- Forecast bias
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Statistical Test of Forecast Bias
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 9.6 Graphic Evaluation of Forecast Performance
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Forecasting under Market Efficiency
- Weak-form efficiency: historical and current exchange rate information is already reflected in today’s exchange rate and is not useful for forecasting.
- Semistrong-form efficiency: all relevant public information is already reflected in today’s exchange rate.
- Strong-form efficiency: all relevant public and private information is already reflected in today’s exchange rate.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Methods of Forecasting Exchange Rate Volatility
- Use of recent volatility level
- Use of historical pattern of volatilities
- Implied standard deviation
(
)
(S)
(F)
p
E(e)
S
F
e
E
p
e
E
rate
spot
the
exceeds
rate
forward
he
by which t
percentage
rate
exchange
in the
change
percentage
expected
where
1
)
(
)
(
=
=
-
=
=
t
coefficien
regression
intercept
error term
1
-
t
at time
rate
forward
t
at time
rate
spot
where
1
0
t
1
1
1
0
=
=
=
=
=
+
+
=
-
-
a
a
F
S
F
a
a
S
t
t
t
t
t
m
m
