Chapter 9 (Final Exam) Flashcards
Why do firms forecast exchange rates?
To decide on hedging strategies.
To make short-term investment decisions.
To plan for capital budgeting in foreign projects.
To assess earnings and reinvestment options.
To determine the currency for long-term financing.
What are the four main techniques for forecasting exchange rates?
Technical forecasting: Uses historical data and trends.
Fundamental forecasting: Based on economic factors like inflation and interest rates.
Market-based forecasting: Uses current spot or forward rates.
Mixed forecasting: Combines multiple methods.
What is a limitation of technical forecasting?
It often focuses on the near future and may not work consistently over different periods.
What is fundamental forecasting based on?
Relationships between economic variables such as inflation, interest rates, and income levels.
What are the limitations of fundamental forecasting?
Timing of impacts can be uncertain.
Some factors are hard to predict or quantify.
Relationships may change over time.
How does market-based forecasting work?
Spot rate: Assumes today’s rate predicts future rates.
Forward rate: Assumes it reflects expected future spot rates.
Why might forward rates be more accurate for high-inflation currencies?
Because they capture interest rate and inflation differentials.
What is forecast bias?
when forecasts consistently overestimate or underestimate actual values.
What are the challenges in forecasting exchange rates?
Exchange rates are volatile.
Different forecasting methods have varying success rates.
Market movements are influenced by many unpredictable factors.
