International Financial Management Abridged 10 Edition: by Jeff Madura
International Financial Management Abridged 10 Edition: by Jeff Madura
International Financial Management Abridged 10 Edition: by Jeff Madura
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9
Forecasting Exchange Rates
Chapter Objectives
This chapter will:
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Why Firms Forecast Exchange Rates
1. Hedging decisions
2. Short-term investment decisions
3. Capital budgeting decisions
4. Earnings assessment
5. Long-term financing decisions
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Forecasting Techniques
1. Technical Forecasting
2. Fundamental Forecasting
3. Market-Based Forecasting
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Technical Forecasting
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Fundamental Forecasting
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Market-Based Forecasting
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Mixed Forecasting
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Forecast Error
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Statistical Test of Forecast Bias
St = a0 + a1 Ft −1 + t
where
St = spot rate at time t
Ft −1 = forward rate at time t - 1
t = error term
a0 = intercept
a1 = regression coefficien t
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Exhibit 9.6 Graphic Evaluation of Forecast
Performance
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Forecasting under Market Efficiency
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Methods of Forecasting Exchange Rate
Volatility
1. Use of recent volatility level
2. Use of historical pattern of volatilities
3. Implied standard deviation
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