Exam 9: Forecasting Exchange Rates

When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.

The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.

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

Assume that interest rate parity holds. The UK five-year interest rate is 5% annualized, and the Brazilian five-year interest rate is 8% annualized. Today's spot rate of the Brazilian real is £0.25. What is the approximate five-year forecast of the real's spot rate if the five-year forward rate is used as a forecast?

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 ____.

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

The US 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 dollar is 0.80 euro. Using purchasing power parity, the expected spot rate at the end of one year is ____ euro to the nearest cent.

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

Research indicates that currency forecasting services almost always outperform forecasts based on the forward rate.

If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.

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

Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?

If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.

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

Which of the following is not a forecasting technique mentioned in your text?

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

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

Severus SPA (Italy). 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 euro. Severus has determined that whenever the Canadian dollar appreciates against the euro by more than 1 percent, it experiences a reversal of 40 percent of that movement on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.

A regression analysis of the Australian dollar value on the inflation differential between the UK and Australia produced a coefficient of 0.8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by 0.8%.

A fundamental forecast that uses multiple values of the influential factors is an example of: