Exam 9: Forecasting Exchange Rates

When the value of an influential factor from the prior period affects the forecast in the future period, this is an example of a(n):

Two methods for assessing exchange rate volatility are to use the volatility of historical exchange rate movements and to derive the exchange rate's implied standard deviation from the currency option pricing model.

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.

The ideal currency for short-term deposits by an MNC will exhibit a high interest rate and appreciate over the investment period.

If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.​

Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.

When measuring a forecasting technique's performance among different currencies, it is often useful to examine the relative size of the discrepancies between the forecasted and realized values. Thus, percentages, rather than nominal amounts, are often used to measure forecast errors.

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

When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.

If graphical points lie above the perfect forecast line, then the forecast overestimated the future value.

A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the United States and Canada was 0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

Monson Co., based in the United States, exports products to Japan denominated in yen. If the forecasted value of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the payments.

Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus has determined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1 percent, it experiences a reversal of 40 percent of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.​

Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs.

Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realized value of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____ percent.​

Purchasing power parity is used in:

If the foreign exchange market reflects ____, then historical exchange rate information is not useful in forecasting exchange rate movements.

Which of the following is true?