You provide foreign exchange consulting services using economic fundamental data. Your client would like to have an idea about the US dollar and Mexican peso and US dollar and Japanese yen exchange rates six months in the future. Based on fundamentals create forecast for these exchange rates. To accomplish this you should do the following:
a) Plot the exchange rates and try to identify patterns that can be projected to the future.
b) Get the following economic data for each country including the US: inflation, balance on the current account, interest rates and GDP growth rates.
c) Use the economic data to assess where the exchange rates will be in 6 months.
d) Run a regression between the exchange rate and 2 economic variables. Use the regression to forecast the exchange rate.
2. The client GE sold $300 million in turbines to a Mexican utility payable in 6 months and $500 million to a Japanese utility payable in 1 year.
a) Compute the dollar proceeds from the sales if GE decides to hedge using forward contracts.
b) Compute the dollar proceeds from the sales if GE decides to hedge foreign exchange exposure using options.