Explain the technical technique for forecasting exchange rates

WILL NEED the POWERPOINT AND THE QUESTIONS MENTIONED IN THE OBJECTIVES

Blades, Inc. Case
Forecasting Exchange Rates
Recall that Blades, Inc., the U.S.-based manufacturer of roller blades, is currently both exporting to and importing from Thailand. Ben Holt, Blades’ chief financial officer (CFO), and you, a financial analyst at Blades, Inc., are reasonably happy with Blades’ current performance in Thailand. Entertainment Products, Inc., a Thai retailer for sporting goods, has committed itself to purchase a minimum number of Blades’ Speedos annually. The agreement will terminate after three years. Blades also imports certain components needed to manufacture its products from Thailand. Both Blades’ imports and exports are denominated in Thai baht. Because of these arrangements, Blades generates approximately 10 percent of its revenue and 4 percent of its cost of goods sold in Thailand.

Currently, Blades’ only business in Thailand consists of this export and import trade. Holt, however, is thinking about using Thailand to augment Blades’ U.S. business in other ways as well in the future. For example, Holt is contemplating establishing a subsidiary in Thailand to increase the percentage of Blades’ sales to that country. Furthermore, by establishing a subsidiary in Thailand, Blades will have access to Thailand’s money and capital markets. For instance, Blades could instruct its Thai subsidiary to invest excess funds or to satisfy its short-term needs for funds in the Thai money market. Furthermore, part of the subsidiary’s financing could be obtained by utilizing investment banks in Thailand.

Due to Blades’ current arrangements and future plans, Holt is concerned about recent developments in Thailand and their potential impact on the company’s future in that country. Economic conditions in Thailand have been unfavorable recently. Movements in the value of the baht have been highly volatile, and foreign investors in Thailand have lost confidence in the baht, causing massive capital outflows from Thailand. Consequently, the baht has been depreciating.

When Thailand was experiencing a high economic growth rate, few analysts anticipated an economic downturn. Consequently, Holt never found it necessary to forecast economic conditions in Thailand even though Blades was doing business there. Now, however, his attitude has changed. A continuation of the unfavorable economic conditions prevailing in Thailand could affect the demand for Blades’ products in that country. Consequently, Entertainment Products may not renew its commitment for another three years.

Because Blades generates net cash inflows denominated in baht, a continued depreciation of the baht could adversely affect Blades, as these net inflows would be converted into fewer dollars. Thus Blades is also considering hedging its baht-denominated inflows.

Because of these concerns, Holt has decided to reassess the importance of forecasting the baht-dollar exchange rate. His primary objective is to forecast the baht-dollar exchange rate for the next quarter. A secondary objective is to determine which forecasting technique is the most accurate and should be used in future periods. To accomplish this, he has asked you, as the financial analyst at Blades, for help in forecasting the baht-dollar exchange rate for the next quarter.

Holt is aware of the forecasting techniques available. He has collected some economic data and conducted a preliminary analysis for you to use in your analysis. For example, he has conducted a time-series analysis for the exchange rates over numerous quarters. He then used this analysis to forecast the baht’s value next quarter. The technical forecast indicates a depreciation of the baht by 6 percent over the next quarter from the baht’s current level of $.023 to $.02162. He has also conducted a fundamental forecast of the baht-dollar exchange rate using historical inflation and interest rate data. The fundamental forecast, however, depends on what happens to Thai interest rates during the next quarter and therefore reflects a probability distribution. Based on the inflation and interest rates, there is a 30 percent chance that the baht will depreciate by 2 percent, a 15 percent chance that the baht will depreciate by 5 percent, and a 55 percent chance that the baht will depreciate by 10 percent.

Holt has asked you to answer the following questions:

1. Considering both Blades’ current practices and future plans, how can it benefit from forecasting the baht-dollar exchange rate?

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?

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?

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?

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 baht-dollar 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?

6. What is the expected value of the 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 the expected value as the 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.)

7. Do you think the technique you have identified in question 6 will always be the most accurate? Why or why not?

INSTRUCTIONS (DO THE FULL CASE IF POSSIBLE B4 THE POWERPOINT///NO NEED TO DO THE VOCAL////JUST DO THE POWERPOINTS)

Forecasting Exchange Rates

Objective

For your Course Project, you will be placed in groups of 4 - 6 students and work collaboratively to prepare a 20- slide presentation to discuss Blades, Inc. Case on pg. 321 in your text.

You should provide a background on the case as well answer the following questions within your presentation:

1. Considering both Blades' current practices and future plans, how can it benefit from forecasting the baht-dollar exchange rate?

2. Use all following three techniques to forecast the future of the baht

· Fundamental forecasting

· Market-based forecasting

· Technical forecasting including the performance evaluation bias and its graphic evaluation.

3. Which forecasting technique (fundamental, technical or market-based) would be easiest to use in forecasting the future value of the baht? Why?

You will also be required to give an oral presentation along with your presentation using Narrated PowerPoint or another multimedia tool of your choosing. Each group member must present.

Guidelines

· In Week 1, you will prepare a Team Charter (see Files tab).

· The PowerPoint presentation must be at least 20 slides in length including a cover page, introduction, body of the report, summary or conclusion, and references.

· Even though this is not a scientific-type writing assignment and is mostly creative in nature, references are still very important. At least six authoritative, outside references are required (anonymous authors or web pages are not acceptable). These should be listed on the last page, titled "References."

· Appropriate citations are required throughout the PowerPoint presentation.

· All University policies are in effect, including the plagiarism policy.

· Presentations are due during Week 8 of this course.

· Any questions about this paper may be discussed in the Course Q & A Forum in the Introduction and Resources module.

· This presentation is worth 180 total points and will be graded on quality of information, use of citations, grammar, and its structure.

Milestones

Week 1: Submit Team Charter

Week 5: Submit your first draft of the PowerPoint Presentation.

Week 7: Complete and submit your final version of your PowerPoint presentation

Week 8: Submit Peer Review (individual assignment)

Grading Rubrics

Category

Points

%

Description

First Draft

50

8.5

PowerPoint draft is due in Week 5; it should include all sections described in the guidelines.

Course Project: Final PowerPoint Presentation

Cohesiveness and Formatting

20

8.5

Your presentation should follow APA guidelines and format, with a minimum of six research references. PowerPoint slides are well organized using headings and subheadings.

Grammar

20

8.5

Your presentation demonstrates graduate-level writing, including proper grammar, spelling, punctuation, and good sentence structure.

Notes and Multimedia Video

60

29

Notes and multimedia video are inserted for explanations

Content

80

35

Your presentation includes all required sections with clarity of thinking and application of basic principles and tools presented in the course.

PowerPoint Presentation Total

180

-

Total

230

100

CASE STUDY

Internet/Excel Exercises, page 434, text

Record your findings in a Word document and submit it online

IBM has substantial operations in many countries, including the United States, Canada, and Germany. Go to finance.yahoo.com/q?s=ibm.

1. Click on Historical Prices. (Or apply this exercise to a different MNC.) Set the date range so that you can obtain quarterly values of the U.S. stock index for the last 20 quarters. Insert the quarterly data on a spreadsheet. Compute the percentage change in IBM’s stock price for each quarter. Next go to finance.yahoo.com/stock-center/ and click (under U.S.) on S&P Composite 1500 Index, which represents the U.S. stock market index, so that you can derive the quarterly percentage change in the U.S. stock index over the last 20 quarters. Then run a regression analysis with IBM’s quarterly return (percentage change in stock price) as the dependent variable and the quarterly percentage change in the U.S. stock market’s value as the independent variable. (Appendix C explains how Excel can be used to run regression analysis.) The slope coefficient serves as an estimate of the sensitivity of IBM’s value to the U.S. market returns. Also, check the fit of the relationship based on the R-squared statistic.

2. Go to finance.yahoo.com/stock-center/ and click (under “Europe”) on DAX, which represents the German stock market index. Repeat the process described in exercise 1 so that you can assess IBM’s sensitivity to the German stock market. Compare the slope coefficient between the two analyses. Is IBM’s value more sensitive to the U.S. market or the German market? Does the U.S. market or the German market explain a higher proportion of the variation in IBM’s returns (check the R-squared statistic)? Offer an explanation of your results.