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Predicting Exchange Rate Movements Whether international businesses are concened with the long-term profitability of foreign investment, export opportunities, the price competitiveness of foreign imports, or the short-term foreign exchange transactions that occur on a daily basis, the firm must pay attention to exchange rate movements. These movements can affect whether a deal results in a profit or a loss Exchange rate movements are extremely difficult to predict, though businesses need some forecasting ability to plan. A number of theories, methods, and borrowings from other disciplines have been applied to the movement of exchange rates. Some ches work better in the short-run, while others apply more appropriately to longer-term plans. Managers in international enterprises must understand the predictive power and uses of the theories and approaches to use them effectively in strategy and operations. Roll ovor oach factor to road the doscription. While prodiction is imporfoct, idontify which of the factors below are better short-range predictors and which are better long-range predictors of movements in foreign exchange rates investor expectations Long-Range Predictors Short-Range Predictors bandwagon effect relative inflation rates nominal interest rate relative monetary growth psychological effects

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Long Range Predictors Short Range Predictors 1. The relative inflation rates have a long1 Investor expectations about the future run impact on exchange rates. This is because the price differential between two countries is adjusted by changes in their exchange rate. exchange rates, export, and import, among other fundamentals, alter the short run exchange rates. 2. The nominal interest rate differentials2. Bandwagon effects involve the people affect the demand for currencies thereby leading to changes in exchange rates attempting something because the majority is doing that. These effects affect the exchange rate in short run 3. Monetary growth affects the inflation3. Psychological effects impact the rates, thereby impacting the long run exchange rates. expectations about exchange rate. Hence, determine short run exchange rates

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