{"id":3211,"date":"2024-09-02T09:53:02","date_gmt":"2024-09-02T05:53:02","guid":{"rendered":"https:\/\/eoninvestment.com\/?p=3211"},"modified":"2024-09-02T09:53:02","modified_gmt":"2024-09-02T05:53:02","slug":"cross-border-forecasts","status":"publish","type":"post","link":"https:\/\/eoninvestment.com\/ka\/2024\/09\/02\/cross-border-forecasts\/","title":{"rendered":"Cross-Border Forecasts"},"content":{"rendered":"\n

Subsidiary companies operating in another country use the local currency. Therefore, their evaluation requires special considerations. <\/p>\n\n\n\n

In this entry, I will discuss forecasting cash flows for a subsidiary company operating in another country. There are two approaches:<\/p>\n\n\n\n

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  1. Spot-Rate Method<\/strong> – This involves forecasting cash flows in the subsidiary’s local currency, then discounting these flows at the appropriate local currency rate, and finally converting the result to the parent company’s currency at the current exchange rate.<\/li>\n\n\n\n
  2. Forward-Rate Method<\/strong> – This involves forecasting cash flows in the parent company’s currency based on the relevant forward exchange rates, and then discounting these flows at the appropriate parent company currency rate.<\/li>\n<\/ol>\n\n\n\n

    Regardless of which method is used, the final result should be the same.<\/p>\n\n\n\n

    To achieve the same result from calculations in both currencies, it is essential to pre-calculate exchange rates based on inflation and interest rate data. Predicting exchange rates arbitrarily will inevitably lead to inaccuracies.<\/p>\n\n\n\n

    The table shows how interest rates, inflation, exchange rates, and the resulting nominal and real cash flows in both currencies are interconnected, ensuring that the discounted results are the same.<\/p>\n\n\n\n

    Here, we deal with two main hypotheses:<\/p>\n\n\n\n