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(BQ) Part 2 book "International financial management" has contents: Forecasting exchange rates, measuring exposure to exchange rate fluctuations, managing transaction exposure, managing transaction exposure, direct foreign investment, multinational capital budgeting, country risk analysis,.and other contents. | 9 Forecasting Exchange Rates CHAPTER OBJECTIVES The specific objectives of this chapter are to: ■ explain how firms can benefit from forecasting exchange rates, ■ describe the common techniques used for forecasting, The cost of an MNC’s operations and the revenue received from operations are affected by exchange rate movements. Therefore, an MNC’s forecasts of exchange rate movements can affect the feasibility of its planned projects and might influence its managerial decisions. An MNC’s revisions of exchange rate forecasts can change the relative benefits of alternative proposed operations and may cause the MNC to revise its business strategies. WHY FIRMS FORECAST EXCHANGE RATES The following corporate functions typically require exchange rate forecasts: ■ explain how forecasting performance can be evaluated, and ■ ■ explain how interval forecasts can be applied. Laredo Co., based in the United States, plans to pay for clothing imported from Mexico in 90 days. If the forecasted value of the peso in 90 days is sufficiently below the 90-day forward rate, the MNC may decide not to hedge. Forecasting may enable the firm to make a decision that will increase its cash flows. • ■ EXAMPLES Hedging decision. 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. Short-term investment decision. Corporations sometimes have a substantial amount of excess cash available for a short time period. Large deposits can be established in several currencies. The ideal currency for deposits will (1) exhibit a high interest rate and (2) strengthen in value over the investment period. Lafayette Co. has excess cash and considers depositing the cash into a British bank account. If the British pound appreciates against the dollar by the end of the deposit period when pounds will be withdrawn and exchanged for U.S. dollars, more dollars will
