Exam 9: Forecasting Exchange Rates

Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

According to the text, research generally supports ____ in foreign exchange markets.

​Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?

If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all relevant private information, then ____ would be refuted.

Inflation and interest rate differentials between the United States and foreign countries are examples of variables that could be used in fundamental forecasting.

Market-based forecasting involves the use of historical exchange rate data to predict future values.

The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD): ​ AUD_t = a₀ + a₁INT_t + a₂INF_{t - 1} + $\mu$ _t, ​ Where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a₀ = .001; a₁ = -.8; and a₂ = .5. Assume that INF_{t - 1} = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution: ​ Probability Possible Outcome 20% -3% 80% -4% ​ There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____.

If the pattern of currency values over time appears random, then technical forecasting is appropriate.

The closer graphical points are to the perfect forecast line, the better the forecast.

If foreign exchange markets are weak-form efficient, then all relevant public and private information is already reflected in today's exchange rates.

MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.

If a particular currency of a developed country is consistently declining substantially over time, then a market-based forecast of that currency will usually have:

If a foreign currency is expected to ____ substantially against the parent's currency, the parent may prefer to ____ the remittance of subsidiary earnings.

Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.

Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used for longer-term forecasts.

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

If both interest rate parity and the international Fisher effect hold, then between the forward rate and the spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.​

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:

If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.​