Exam 9: Forecasting Exchange Rates

If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively.

Which of the following is true according to the text?

Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.

Which of the following is not a method of forecasting exchange rate volatility?

Assume that U.S. interest rates for the next three years are 5 percent, 6 percent, and 7 percent, respectively. Also assume that Canadian interest rates for the next three years are 3 percent, 6 percent, and 9 percent. The current Canadian spot rate is $.840. What is the approximate three-year forecast of the Canadian dollar's spot rate if the three-year forward rate is used as a forecast?

Forecast errors tend to be large for short forecast horizons.

A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.

Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased: ​ S_t = a₀ + a₁F_{t - 1} + $\mu$ _t, ​ Where S_t is the spot rate of the yen in year t and F_{t - 1} is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate.

The potential forecast error is larger for currencies that are more volatile.

Which of the following is not a limitation of technical forecasting?

In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.

If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be ____, meaning that the forward rate and the spot rate will provide ____ forecasts.​

If the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:​

Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.

​Which of the following forecasting techniques would be most likely to use today's forward exchange rate to forecast the future exchange rate?

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro: euro_t = b₀ + b₁INF_{t - 1} + b₂INC_{t - 1} ​ = )005 + .9INF_{t - 1} + 1.1INC_{t - 1} ​ The most recent quarterly percentage change in the inflation differential between the United States and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the United States and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____ percent.

​Which of the following forecasting techniques would be most likely to use today's spot exchange rate of the euro to forecast the euro's future exchange rate?

If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expected percentage change in the euro is ____ percent.

The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.

Foreign exchange markets appear to be strong-form efficient.