Question

major forecasting principles and how to apply them in practice

Answer 1

Forecasting is the estimation of most probable scenario or outcome which is expected to occur based on some tools and techniques. It has certain general principles which are describes below as :-

1. Forecasting is more accurate for a bundle of items = when it comes to forecasting it is important to note that forecasting can be done with more accuracy for a general group of item which comprised of extreme value items as well as low value items which results in a general Outlook. Thus, we can say that forecasting shows more accurate result if done on a general group of items rather than individual .

2 . Forecasting do not gives guarantee = You can not be assured that what you have forecasted is bound to happen and the actual result may be quite different from that which have been forecasted, it is because forecasting is done on the basis of certain assumptions and those assumptions may not hold good under certain circumstances. Further every forecasting tool has its limitations and those limitations may play a part resulting in adverse results. Thus, forecasting is not full proof and cannot guarantee an outcome.

3. Role of biasedness = It depends on forecaster which tool or method is used by him in forecasting and thus as a result of which for a same situation two forecaster can come out with different forecasts Based on different forecasting tools and techniques. Thus, in forecasting there is some involvement of biasedness of forecaster.

4. Forecasting is more accurate for short time period = It should be noted that the environment in which we are living currently is full of uncertainties and those uncertainties increases with the passage of time therefore longer the time horizon greater will be the uncertainties. Thus, forecasting is more accurate in case of short time horizon.

Forecasting has various application in various diversified fields :-

1. Forecasting a particular stock return = we can forecast how much a particular stock can give Return and based on such forecasting can accordingly decide future course of action. Generally we use efficient market hypothesis to predict it.

2 . Forecasting of foreign exchange = An organization which is highly dependent on import or export has to make forecasting of future foreign exchange rate in order to hedge their exposure. A variety of chart analysis as well as fundamental analysis is required to forecast it

3. Forecasting demand = A manufacturing company produces product on the basis of forecast of demand of it's product . Forecasting of entire supply chain management process is required , analysis of previous year figure, current environment, market trends and various other factors have to be looked before for this purpose.

Not only this forecasting has a wide variety of usage not only for business purposes but for other purposes like political forecasting, technological forecasting etc.