With reference to the case study given below Answer the questions given at the end of the case study. Plates, Inc., the U.S.-based manufacturer of roller Plates, is currently both exporting to and importing from Pakistan. Ben Michal, Plates chief financial officer (CFO), and you, a financial analyst at Plates, Inc., are reasonably happy with Plates current performance in Pakistan. The Sialkot Sports Products, Inc., a Pakistani retailer for sporting goods, has committed itself to purchase a minimum number of Plates Speedos annually. The agreement will terminate after 3 years. Plates also imports certain components needed to manufacture its products from Pakistan. Both Plates imports and exports are denominated in PKR. Because of these arrangements, Plates generates approximately 10 percent of its revenue and 4 percent of its cost of goods sold in Pakistan. Currently, Plates only business in Pakistan consists of this export and import trade. Ben Michal, however, is thinking about using Pakistan to augment Plates U.S. business in other ways as well in the future. For example, Michal is contemplating establishing a subsidiary in Pakistan to increase the percentage of Plates sales to that country. Furthermore, by establishing a subsidiary in Pakistan, Plates will have access to Pakistans money and capital markets. For instance, Plates could instruct its Pakistani subsidiary to invest excess funds or to satisfy its short-term needs for funds in the Pakistani money market. Furthermore, part of the subsidiarys financing could be obtained by utilizing investment banks in Pakistan. Due to Plates current arrangements and future plans, Ben Michal is concerned about recent developments in Pakistan and their potential impact on the companys future in that country. Economic conditions in Pakistan have been unfavorable recently. Movements in the value of the PKR have been highly volatile, and foreign investors in Pakistan have lost confidence in the PKR, causing massive capital outflows from Pakistan. Consequently, the PKR has been depreciating. When Pakistan was experiencing a high economic growth rate, few analysts anticipated an economic downturn. Consequently, Michal never found it necessary to forecast economic conditions in Pakistan even though Plates was doing business there. Now, however, his attitude has changed. A continuation of the unfavorable economic conditions prevailing in Pakistan could affect the demand for Plates products in that country. Consequently, The Sialkot Sports Products may not renew its commitment for another 3 years. Since Plates generates net cash inflows denominated in PKR, a continued depreciation of the PKR could adversely affect Plates, as these net inflows would be converted into fewer dollars. Thus, Plates is also considering hedging its PKR-denominated inflows. Because of these concerns, Michal has decided to reassess the importance of forecasting the PKR- dollar exchange rate. His primary objective is to forecast the PKR-dollar exchange rate for the next quarter. A secondary objective is to determine which forecasting technique is the most accurate and should be used in future periods. To accomplish this, he has asked you, a financial analyst at Plates, for help in forecasting the PKR-dollar exchange rate for the next quarter.

Michal is aware of the forecasting techniques available. He has collected some economic data and conducted a preliminary analysis for you to use in your analysis. For example, he has conducted a time-series analysis for the exchange rates over numerous quarters. He then used this analysis to forecast the PKRs value next quarter. The technical forecast indicates a depreciation of the PKR by 6 percent over the next quarter from the PKRs current level of $.023 to $.02162. He has also conducted a fundamental forecast of the PKR-dollar exchange rate using historical inflation and interest rate data. The fundamental forecast, however, depends on what happens to Pakistani interest rates during the next quarter and therefore reflects a probability distribution. Based on the inflation and interest rates, there is a 30 percent chance that the PKR will depreciate by 2 percent, a 15 percent chance that the PKR will depreciate by 5 percent, and a 55 percent chance that the PKR will depreciate by 10 percent. Ben Michal has asked you to answer the following questions: 1. Considering both Plates current practices and future plans, how can it benefit from forecasting the PKR-dollar exchange rate? 2. Which forecasting technique (i.e., technical, fundamental, or market-based) would be easiest to use in forecasting the future value of the PKR? Why? 3. Plates is considering using either current spot rates or available forward rates to forecast the future value of the PKR. Available forward rates currently exhibit a large discount. Do you think the spot or the forward rate will yield a better market-based forecast? Why? 4. The current 90-day forward rate for the PKR is $.021. By what percentage is the PKR expected to change over the next quarter according to a market based forecast using the forward rate? What will be the value of the PKR in 90 days according to this forecast? 5. Assume that the technical forecast has been more accurate than the market-based forecast in recent weeks. What does this indicate about market efficiency for the PKR-dollar exchange rate? Do you think this means that technical analysis will always be superior to other forecasting techniques in the future? Why or why not? 6. What is the expected value of the percentage change in the value of the PKR during the next quarter based on the fundamental forecast? What is the forecasted value of the PKR using the expected value as the forecast? If the value of the PKR 90 days from now turns out to be $.022, which forecasting technique is the most accurate? (Use the absolute forecast error as a percentage of the realized value to answer the last part of this question.)