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Running Head: EXCHANGE RATE FORECASTING

Exchange Rate Forecasting
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EXCHANGE RATE FORECASTING
Introduction
The nature of exchange rate forecasting may affect the prosperity of the investment. This
paper highlights the advantages and disadvantages of the energy drinks investment based upon
forecasting foreign currency exchange rates, interest rate and relative purchasing power parity and
forecasting, foreign investment policies, government limitations on foreign investments, trade
regulations and policies, and international finance regulations.
Forecasting Foreign Currency Exchange Rates
Investing in the international venture implies that the business is subject to the currency
price that the foreign exchange market sets (Froot and Thaler, 2010). This is done on the basis of
supply and demand through comparison with other currencies.
Advantages
One of the advantages of forecasting foreign currency exchange rates is that the exchange
rates correct balance of payment deficits (Froot and Thaler, 2010). A foreign currency exchange
rate may depreciate to provide such compensation. This would help restore the competitiveness of
the venture. Another advantage is that the investment will not face capital flow restrictions (Froot
and Thaler, 2010). In a foreign currency exchange rate, macroeconomic fundamentals of nations
impact upon international market exchange rate and, ultimately, portfolio flows between nations.
Therefore, foreign currency exchange rates enhance market efficiency. The economic problems of
other countries would not affect the investment is also another advantage (Froot and Thaler, 2010).
For instance, a rising inflation rate in the ...