JPMorgan Chase's Forecasting Accuracy 2018.05.09

JPMorgan Chase's Forecasting Accuracy Veselina (Vesi) Dinova was asked by her director at Teknekron (US) to review the exchange rate forecasting accuracy of her company's primary financial services provider, JPMorgan Chase (JPMC). Vesi focused on the three primary currencies the company's 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.

JPMorgan Chase's Forecasting Accuracy The rise of the euro against the dollar in recent years had, however, raised the interest in the accuracy of these forecasts. Assessing that accuracy was now Vesi's task. Focusing first on the U.S. 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 A, the results were not encouraging.

JPMorgan Chase's Forecasting Accuracy

JPMorgan Chase's Forecasting Accuracy Although JPMC had bit the actual spot rate dead-on in both May and November 2002, the size of the forecasting errors and direction of movement see med to increase over time. 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/€.

JPMorgan Chase's Forecasting Accuracy This was in fact a massive difference. 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. 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.

JPMorgan Chase's Forecasting Accuracy Teknekron's 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 approach required Vesi's company to manage and control its cost of goods sold-including the yen-denominated costs. Vesi now turned to the predicted accuracy of JPMC on the yen. Exhibit B provides an overview of that analysis.

JPMorgan Chase's Forecasting Accuracy

JPMorgan Chase's Forecasting Accuracy 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/$, although the forecast had been to follow trend to ¥96/$.

JPMorgan Chase's Forecasting Accuracy Case Questions 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?

JPMorgan Chase's Forecasting Accuracy Forecasting the future is obviously a daunting challenge. All things considered, how well do you think JPMC is doing? If you were Vesi, what would you conclude about the relative accuracy of JPMC’s spot rate forecasts?