Challenges in Forecasting Exchange Rates by Multinational Corporations Ms 12may2016
Challenges in Forecasting Exchange Rates by Multinational Corporations Ms 12may2016
Challenges in Forecasting Exchange Rates by Multinational Corporations Ms 12may2016
AU TH O R 1 - M R . S C . M I L O R AD S TAM E N O V I C
AU TH O R 2 - P R O F.D R TATJ AN A C V E TK O V S K I
AU TH O R 3 - P R O F. D R D I N K O P R I M O R AC
INTRODUCTION
Transaction risk, cash flow risk that deals with the effect of exchange
rate moves it influence to receivables (export contracts), payables
(import contracts), or repatriation of dividend.
Economic risk, risk to the firm present value of future operating cash
flows from exchange rate movements, Economic risk influence on
exchange rate on revenues (domestic sales and exports) and
operating expenses (cost of domestic inputs and imports).
HEDGING DECISION
Hedging decision is closely related to revealing potential risks which may
influence on exchange rate (Papaioannou, 2006)
In practice, chosen hedging strategy mostly depends on frequency of
certain type of risk and the size of the MNC (Papaioannou M, 2006).
1. Fundamental approach
2. Technical approach
3. Market based
4. Mixed
EXCHANGE RATE
FORCASTING
For operation of measuring translation gains and losses and also
translation operating exposure MNC need to make accurate
estimation of future exchange rates.
In a case of Hedged position, there is option in which such situation
could lead to losses in future if exchange rates are constantly differ
from forecasted ones.
If analysis is based on empirical results, we can say that
results are not still on satisfactory level according to numerous
literatures.
General opinion is that spot exchange rate is random-walk and
structural exchange rate models are not able to forecast this
simple random-walk model.
CONCLUSION
MNCs need to monitor and forecast foreign exchange in order
to have clear assessment in regards of their current and future
business conditions.
Without sophisticated analyzing of exchange rate movements,
MNC will be completely out of data which are of outmost
importance for its strategic business activities.
In this paper there is described relation between decision of
management for investments, loans, hedging, budgeting on
short and long run on one side and further measuring of
specific risk exposure of MNCs.
Also, in paper are displayed systems for risk measurement
which are highly important for resolving this specific risk issue.
CONCLUSION
MNC management is at high pressure in order to bring appropriate
determination of future currency fluctuation.
As most of economics literature states, long term and short term
forecasting needs to be done with different analyzing techniques with
usage of different models but long term forecasting is something that
is not so reliable for decision making processes.
In managing risks, MNC often use hedging strategies, and specific
hedging strategy depends from respective situation.
Hedging strategies becomes very complicated because they are
developed to address transaction, translation and also economic risk.
As these risks are something that influence all companies (not
considering size of companies) - there is increased number of users of
hedging strategies and there is higher demand for hedging protection
and also greater variety of hedging instruments (Papaioannou M, 2006).
THANK YOU!
Milorad Stamenovic
[email protected]
+381 63 273 978