International Financial Management Chapter 9 Case study

Chapter 9 Solution to Continuing Case Problem: Blades, Inc. 1. Considering both Blades’ current practices and future plans, how can it benefit from forecasting the baht-dollar exchange rate? One way Blades can benefit is by hedging the cash flows that it generates in Thai baht on the exchange rate forecast. Another way may establish a subsidiary in Thailand. Revenues generated by the subsidiary will be taken back to Blades and that will help him make hedging decisions. If Blades is able to forecast the baht-dollar exchange rate, he will be able to make decisions that position the company to benefit from the market 2. Which forecasting technique (i.e., technical, fundamental, or market-based) would be easiest to use in forecasting the future value of the baht? Why? The easiest to use would be a market based forecast. The fundamental forecast is harder to use, and it is not always more accurate than the market-based.

3. Blades is considering using either current spot rates or available forward rates to forecast the future value of the baht. Available forward rates currently exhibit a large discount. Do you think the spot or the forward rate will yield a better market-based forecast? Why? I think the forward rate will yield a more precise answer. The forward rate of the thai baht has a discount, meaning that it has a higher interest rate that leads to an upcoming increase of inflation levels. The spot rate would not be helpful because it will say that the baht’s value will stay the same.

4. The current 90-day forward rate for the baht is $.021. By what percentage is the baht expected to change over the next quarter according to a market-based forecast using the forward rate? What will be the value of the baht in 90 days according to this forecast? $.021- .023/ .023 = -8.7% that’s the percentage is expected to change over the next quarter. The forecasted value of the baht in 90 days will be .021 which is the forward rate.

5. Assume that the technical forecast has been more accurate than the market-based forecast in recent weeks. What does this indicate about market efficiency for the bahtdollar exchange rate? Do you think this means that technical analysis will always be superior to other forecasting techniques in the future? Why or why not?

This would indicate that the foreign exchange market for the Thai Baht is not efficient because today’s exchange rate should not be able to reflect all the historical information that affects the Thai baht.

6. What is the expected percentage change in the value of the baht during the next quarter based on the fundamental forecast? What is the forecasted value of the baht using this forecast? If the value of the baht 90 days from now turns out to be $.022, which forecasting technique is the most accurate? (Use the absolute forecast error as a percentage of the realized value to answer the last part of this question.) .3 x -2% + .15 x -5% + .55 x -10% = -6.85% is the percentage that is expected to change in the value of the baht. .023 x 1 -.0685 = .0214 is the forecasted value of the baht in 90 days using a fundamental forecast. The technical forecast is more accurate.

7. Do you think the technique you have identified in question 6 will always be the most accurate? Why or why not? Not always because the exchange market for the Thai baht may turn around and be more efficient in the future, meaning that the historical information would make the forecasting less accurate. Also, the high levels of volatility can cause abrupt changes in the value of the baht which would make it very hard to forecast. Solution to Supplemental Case: Whaler Publishing Co. 1.

Currency

Approximate

68 Percent

95 Percent

Standard

Confidence

Confidence

Deviation

Interval

Interval

Australian $

9.60%

$.693 to $.841

$.620 to $.914

Canadian $

5.1

$.819 to $.916

$.776 to $.95

New Zealand $

12.01

$.527 to $.671

$.453 to $.741

British pound

16.43

$1.63 to $2.26

$1.31 to $2.58

The intervals used with the units received of each currency allow us to forecast the revenues in dollars for every country.

Currency

68 Percent

95 Percent

Confidence

Confidence

Interval

Interval

Australian $

$26,353 to $31,956

$23,560 to $34,749

Canadian $

$28,647 to $31,728

$27,106 to $33,268

New Zealand $

$17,384 to $22,128

$14,999 to $24,512

British pound

$55,090 to $76,702

$44,292 to $87,511

The above information shows that the Canadian dollar is the most stable currency of all. It is easier to predict the revenues coming from Canada. The British pound is the most volatile which makes them the least predictable one. Small Business Dilemma Sports Exports Company 1. Explain how Jim can use technical forecasting to forecast the future value of the pound. Based on the information provided, do you think that a technical forecast will predict future appreciation or depreciation in the pound?

A technical forecast should show an appreciation of the pound due to the fact that the historical information shows the pounds value appreciating. Jim would develop this technical forecast by using the historical values of the pound and that would allow him to estimate the future values of the pound. 2. Explain how Jim can use fundamental forecasting to forecast the future value of the pound. Based on the information provided, do you think that a fundamental forecast will predict appreciation or depreciation in the pound?

A fundamental forecast would show a depreciation of the pound because there was high inflation in the past. Then Jim would think that the inflation will increase and the pound will lose value. Jim would develop the fundamental forecast by analyzing the way the pound has changed in different economic changes.

3. Explain how Jim can use a market-based forecast to forecast the future value of the pound. Do you think the market-based forecast will predict appreciation, depreciation, or no change in the value of the pound? Depends if he uses the spot rate or forward rate in the market-based forecast. The spot rate will not show any changes in the value of the pound. The forward rate would show a depreciated value of the pound because the interest rate is higher than the USA interest rate.

4. Does it appear that all of the forecasting techniques will lead to the same forecast of the pound’s future value? Which technique would you prefer to use in this situation? They do not lead to the forecast of the pound’s future value. I would prefer using the fundamental because it uses the impact that different economic conditions has on the pound. This will allow us to know how the pound is affected by different economic situations and if there is a repetition of the economic environment, the pound can be forecasted more accurately.