Briefly stated, forecasting techniques follow either the traditional, fundamental
approach or the more recent technical, analytical approach.
(b) Fundamental Approach. The fundamental approach has evolved from classical
economics. In applying this technique, management (usually, the treasurer) assesses
certain economic and sociopolitical variables of a nation to predict the economy’s
performance and how such performance will affect the supply of, and demand for,
that nation’s currency. Economic variables include domestic monetary and fiscal pol-
icy, inflation rates, unemployment, development of natural resources, international
trade competitiveness, and capital flows. Sociopolitical variables include the general
attitude of government and population towards the private business sector, the sys-
tem of government, its involvement in the commercial sector, labor relations, and the
degree of political stability. The forecaster must also be aware of the sensitivity of
each variable and its relative importance with respect to the time horizon projected.
Relevant variables should be forecast for the times of interest to management in the
budgeting process, for example, one, three, or five years.
(c) Technical Approach. Technical analysis has developed from the study of inter-
national money market behavior in an attempt to predict cyclical trends in the de-
mand and supply of individual currencies. This forecasting technique concentrates
more on predicting the timing of exchange rate movements than on the underlying
fundamentals per se. By forecasting when a shift in currency values is expected, the
user of technical analysis expects to be in a position to hedge accordingly. Technical
analysts often postulate that the market adjusts too swiftly to changes in fundamen-
tal variables to make a forecast based on fundamentals meaningful. They argue that
it is best to observe the signals which mark a change in market mentality and to climb
on board before the market leaves them behind. Fundamentalists have often argued
that this game plan is little better than the “school of fish” theory, which states that a
fish is best protected if it swims with the maintream and in the center of the school
out of a predator’s reach.
Regardless of the forecast discipline employed, the ability to predict exchange
rates accurately remains particularly important, given the degree of volatility in the
present floating-rate system. From a practical point of view, management must de-
cide whether it wants to forecast exchange rates on the basis of one of the aforemen-
tioned theories or whether it concludes that exchange rates cannot be forecast and
that, therefore, the current exchange rates (at the time of initiating a particular budget
cycle) should be used for the forward period (an exception would be made for hy-
perinflationary countries, where the fundamental theory would be adopted).
25.3 THE MULTINATIONAL ORGANIZATION
(a) Corporate Structure. Before more specific budgeting and control systems are
presented, a basic corporate structure must be established. In actuality, corporate
structures vary widely, from a strong parent company with numerous subsidiaries
taking directions from the parent company to a parent company which, in effect, is
literally a holding company which ties together virtually independent subsidiaries.
Thus, practices depend upon the corporate culture developed within the companies.
25.3 THE MULTINATIONAL ORGANIZATION 25 • 3