8 FORECASTING EXCHANGE RATES

CHAPTER OBJECTIVES

 Explain how and why companies can benefit from forecasting exchange
rates
 Describe the common techniques used for forecasting
 Understand forecast error and how forecasting performance can be
evaluated
 Explain how interval forecasts can be applied.

The specific objectives of Chapter

Jeff Madura, Ariful 08 are to:
Hoque,   explain how
Chandrasekhar and why companies
Krishnamurti, can
International benefitManagement,
Financial from forecasting exchange rates
2nd Asia-Pacific describe
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Cengage Australia
common techniques used
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 FORECASTING EXCHANGE RATES

Forecasting is a technique that uses historical data as

inputs to make informed estimates that are predictive
 in determining the direction of future trends.
Businesses utilize forecasting to determine how to
allocate their budgets or plan for anticipated 
expenses for an upcoming period of time. This is
typically based on the projected demand for the
goods and services offered.

The specific objectives of Chapter

Jeff Madura, Ariful 08 are to:
Hoque,   explain how
Chandrasekhar and why companies
Krishnamurti, can
International benefitManagement,
Financial from forecasting exchange rates
2nd Asia-Pacific describe
Edition. © 2021 the
Cengage Australia
common techniques used
Pty Ltd. Allfor forecasting
Rights Reserved.understand
May not beforecast
forecasts
scanned,errorcan
and
copied orbe
howapplied
forecasting
duplicated, performance
or posted can
to a publicly be evaluated
accessible explain
website, how
in whole or in part.
interval
 WHY COMPANIES FORECAST EXCHANGE RATES

Hedging decisions
 Whether a company hedges may be determined by its forecasts of foreign currency values
Short-term investment decisions
 Corporations sometimes have a substantial amount of excess cash available for a short time period.
Large deposits can be established in several currencies
Capital budgeting decisions
 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.

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 WHY FIRMS FORECAST EXCHANGE RATES

Earnings assessment
 The parent’s decision about whether a foreign subsidiary should reinvest earnings in a
foreign country or remit earnings back to the parent may be influenced by exchange
rate forecasts
Long-term financing decisions
 MNCs that issue bonds to secure long-term funds may consider denominating the
bonds in foreign currencies
An MNC’s motives for forecasting exchange rates are summarised in Exhibit 8.1.

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