Global Foreign-Exchange Markets/ The Determination of Exchange Rates
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1. As a CFO of a company that exports to Europe, the company has received a contract to supply components to a German manufacturer. What are various approaches available to help accurately forecast the exchange rates? What are some implications of exchange-rate changes on the company's marketing, production, and financial decisions?
2. Perform an online search for an article on the International Monetary Fund (IMF). Read the article, and think about how the topic relates to the concepts "The Determination of Exchange Rates".
Write a brief summary report (1 page), and discuss how the article relates to the IMF's position of influence on individual nation's economic policy.
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Solution Summary
This solution explains foreign exchange changes and the challenges caused by it. The sources used are also included in the solution.
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Step 1
There are several approaches available for forecasting the exchange rates. The first is the purchasing power parity method. In this approach the assumption of one price is used which mean that identical goods in different countries should have identical prices (a). The second approach is to gather factors that a person believes affect the movement of certain currency and creating a model that relates these factors to the exchange rate. This means econometric models are created to forecast the foreign exchange rate (b). The third method looks at the strength of economic growth in different countries to forecast the direction of exchange rates. This approach assumes that strong economic environment and high growth rate are more likely to attract investments from foreign investors. The fourth approach is that past behavior and price patterns can be used to predict future price behavior and patterns. In this method a time series model is applied to past data.
When there are exchange rate changes, marketing gets a boost when the home currency is devalued and marketing gets hurt. when home currency rate increases vis a vis the country to which the company is exporting. ...
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