Exchange Rate Forecasting & Implications
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Assume the role of a CFO of a mid-sized company that exports to Europe. Your company received a contract to supply components to a German manufacturer. Discuss the various approaches available to help you accurately forecast exchange rates. Identify the implications of exchange-rate changes on the company's marketing, production, and financial decisions.
Please include references and citings if possible.
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Solution Summary
This solution is from the point of view of a CFO of a mid-sized company that exports to Europe. His company received a contract to supply components to a German manufacturer. Discuss the various approaches available to help him accurately forecast exchange rates. Identify the implications of exchange-rate changes on the company's marketing, production, and financial decisions.
APA references are included.
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Foreign exchange rates can be forecasted using the fundamental approach or the technical approach. With the fundamental approach data from economic models are used to forecast exchange rates. This data includes GNP, consumption, trade balance, inflation rates, interest rates, unemployment, and productivity indexes. It is generally based upon structural (equilibrium) models, which are modified to take into account "statistical characteristics of the data and the experience of the forecasters," (Bauer, n/d). This method uses educated guesses to determine the forecasted rate, based upon theory or the experience of the forecaster. After forecasts are generated then evaluations are made to adjust the model. With the technical approach, exchange rates are forecasted based upon extrapolations of past price trends. Technical analysis looks for the repetition of specific price patterns. Looking for major trends and turning points. Technical analysis models rely upon moving averages, filers, and momentum indicators. The time series model is a technical approach.
Purchasing power parity (PPP) is used to forecast the direction of exchange rates; this approach is based off the "Law of ...
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