Question

Pick one of the following:

• Technical Forecasting

• Fundamental Forecasting

• Market Based Forecasting

Why might forecasting be used by a multinational corporation? Clearly define the forecasting technique you have chosen. Explain in detail what is involved with the forecasting technique you have chosen. Explain what is meant by market efficiency. Then explain the implications of market efficiency on your chosen technique.

Answer 1

Companies may use technical, fundamental or market based forecasting techniques. Although, the three of the techniques mentioned above come with their own advatages and disadvantages, we are going to discuss about fundamental forecasting which is popularly used.

Fundamental forecasting involves establishing fundamental relationships between economic variables and exchange rates.

It studies all factors related to supply and demand situation of the currency which include political factors, interest rate factors, economic health of the economy, government policies etc.

A simple equation for market movement is:

Economic fundamentals+ human perception= market movement.

It says that any news coming into market is instantly discounted.

Market efficiency refers to the extent to which market prices reflect all the available information, which means that any new information coming into the market is reflected in the stock prices. So, there is no way in which one can beat the market based on the available public information.

The implication of market efficiency in fundamental forecasting is that all the fundamental factors such as the political situation in a country, the prevailing interest rates, etc are incorporated in the stock prices in the particular economy.