JPMorgan Chases Foreign

Exchange Forecasting Accuracy

A case study in evaluating an individual institutions
foreign exchange forecasting accuracy

Veselina (Vesi) Dinova
Had been asked by her director at Teknekron (US) to review the exchange rate forecasting
accuracy of her companys primary financial services provider, JPMorgan Chase (JPMC).
Vesi had focused on the three primary currencies the companys operations revolved
around , the dollar, the euro, and the yen
Teknekron had relied upon JPMC for most of its currency advisory services for years, and
the forecasts provided by JPMC were regularly used in sales and sourcing decisions
including pricing
The rise of the euro against the dollar in recent years had, however, raised the interest in
the accuracy of these forecasts.
US dollar/euro spot exchange rate
Vesi plotted the forecasts provided by JPMC and the actual spot exchange rate for the
2002-2005 period, in 90-day increments
As illustrated by Exhibit 1, the results were not encouraging. Although JPMC had hit the
actual spot rate dead-on in both May and November 2002, the size of the forecasting
errors, and direction of movement, seemed to increase over time
JP Morgans FX Forecasting
Exhibit 1 Monthly Average Exchange
Rates: US$/
Growing Tension Over Accuracy
What was most worrisome to Vesi was that in a good part of 2004, JPMC was getting the
direction wrong. In February 2004 they had forecast the spot rate to move from the current
rate of $1.27/ to $1.32/, but in fact the dollar had appreciated dramatically in the
following three month period to close at $1.19/.
Although Teknekron used a weighted moving average of the actual spot and forecasted
rate in its foreign currency pricing (in this case, in euros), the directional error had caused
the firm to average in a much weaker dollar than what had happened
The buyer had been irritated
Teknekrons Exposure
Whereas Teknekron did most of its sales in North America and Europe (hence the euro-
based pricing), its sourcing was confined to the United States and Japan
Teknekrons Japanese suppliers provided 3% discounts for Japanese yen-denominated
invoicing, which Teknekron had traditionally been happy to take (the discount) and
provide (yen payments)
But this required Vesis company to manage and control its cost of goods sold including
the yen-denominated costs
JP Morgans FX Forecasting
Japanese yen/US dollar spot rate
Vesi now turned to the predicted accuracy of JPMC on the yen
Exhibit 2 provides an overview of that analysis
Once again, although the dollar was consistently falling against the yen,
the forecasting accuracy at least by eyeballing the graphic, was not
encouraging.
The most recent quarter had closed at 108/$, although the forecast had
been to follow trend to 96/$.
JP Morgans FX Forecasting
Exhibit 2 Monthly Average Exchange
Rates: Japanese Yen per U.S. Dollar
1. How would you actually go about calculating the
statistical accuracy of these forecasts? Would
Vesi have been better off using the current spot
rate as the forecast of the future spot rate, 90
days out?
2. Forecasting the future is obviously a daunting
challenge. All things considered, how well do you
think JPMC is doing?
3. If you were Vesi, what would you conclude about
the relative accuracy of JPMCs spot rate
forecasts?
JP Morgans FX Forecasting:
Case Questions