1. Why forecast exchange rates Consider Franco Co, the parent of a USbased multinational corporation (MNC) that uses forecasted exchange rates to assist with various business functions. Suppose that Franco Co is considering issuing bonds to raise funds. The company is considering denominating those bonds in Japanese Yen. Franco Co uses the forecasted value of the yen to make this decision. This is an example of using exchange rate forecasting to assist with capital budgeting V decisions, with the goal of improving the value of the MNC via influencing the dollar value of foreign cash flows v California Co must pay 5 million Mexican pesos by tomorrow, in exchange for supplies that it has agreed to purchase from a supplier in Mexico. The peso depreciated today against the dollar by 5 percent. Using time series data of past currency fluctuations, California observes whenever the peso depreciates against the dollar by more than 1 percent, then the peso tends to depreciate again by about 60 percent of the initial change. Given the results of the v forecasting by California Co, the firm will most likely decide to v