Workshop 8

Why corporations aim to have a good forecast for exchange rates

Explain and compare the following forecast techniques and their limitations: technical, fundamental and market-based forecasts.

Given the following information:

The four-year annualised interest rate in the US is 9 per cent

The four-year annualised interest rate in Canada is 6 per cent.

Interest rate parity holds for a four-year horizon.

The spot rate of the Canada dollar is A$0.60.

(1) If the forward rate is used to forecast exchange rates, what will be the forecast for the Canadadollar's spot rate in four years?20 marks

(2) What percentage appreciation or depreciation does this forecast imply over the four- year period? 20 marks

What factors affect a company's degree of transaction exposure in acurrency? For each factor, explain the desirable characteristics that would reduce transaction exposure.

20 marks