Question 1

Foreign exchange markets are generally found to be at least ____ efficient.

Accepted Answer

A) weak-form 
B) semistrong-form 
C) strong form 
D) none of the above 
A) weak-form 
B) semistrong-form 
C) strong form 
D) none of the above

Question 2

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:
 
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.

Accepted Answer

A) appreciation; 3.4 
B) depreciation; 3.4 
C) appreciation; 0.7 
D) appreciation; 1.2 
A) appreciation; 3.4 
B) depreciation; 3.4 
C) appreciation; 0.7 
D) appreciation; 1.2

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) fundamental forecasting 
B) market-based forecasting 
C) technical forecasting 
D) mixed forecasting 
A) fundamental forecasting 
B) market-based forecasting 
C) technical forecasting 
D) mixed forecasting

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:​

Accepted Answer

A) appreciation of yen's value over the next year. 
B) depreciation of yen's value over the next year. 
C) no change in yen's value over the next year. 
D) information about interest rates is needed to answer this question. 
A) appreciation of yen's value over the next year. 
B) depreciation of yen's value over the next year. 
C) no change in yen's value over the next year. 
D) information about interest rates is needed to answer this question.

Question 8

A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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.
a.True
b.False

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) 9.6 
B) -9.6 
C) 8.8 
D) -8.8 
A) 9.6 
B) -9.6 
C) 8.8 
D) -8.8

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) covered interest arbitrage is feasible. 
B) the international Fisher effect (IF
E)  is supported. 
C) the international Fisher effect (IF
E)  is refuted. 
D) the average absolute error from forecasting would equal zero. 
A) covered interest arbitrage is feasible. 
B) the international Fisher effect (IF
E)  is supported. 
C) the international Fisher effect (IF
E)  is refuted. 
D) the average absolute error from forecasting would equal zero.

Question 16

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?

Accepted Answer

A) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable. 
B) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. 
C) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate. 
D) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable. 
A) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (positively) related to the interest rate variable. 
B) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. 
C) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the exchange rate. 
D) The interest rate variable is directly related to the exchange rate, and the inflation variable is directly related to the interest rate variable.

Question 17

Regression results reveal coefficients of a₀ = 0 and a₁ = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.

Accepted Answer

A) overestimated 
B) underestimated 
C) correctly estimated 
D) none of the above 
A) overestimated 
B) underestimated 
C) correctly estimated 
D) none of the above

Question 18

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

Accepted Answer

A) weaken; delay 
B) weaken; expedite 
C) appreciate; expedite 
D) none of the above 
A) weaken; delay 
B) weaken; expedite 
C) appreciate; expedite 
D) none of the above

Question 19

Sensitivity analysis allows for all of the following except:​

Accepted Answer

A) accountability for uncertainty. 
B) focus on a single point estimate of future exchange rates. 
C) development of a range of possible future values. 
D) consideration of alternative scenarios. 
A) accountability for uncertainty. 
B) focus on a single point estimate of future exchange rates. 
C) development of a range of possible future values. 
D) consideration of alternative scenarios.

Question 20

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.

Accepted Answer

A) spot; high 
B) spot; low 
C) forward; high 
D) forward; low 
A) spot; high 
B) spot; low 
C) forward; high 
D) forward; low

Foreign exchange markets are generally found to be at least ____ efficient.

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

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

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.

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

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:

A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent.

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

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.

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

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. a.True b.False

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.

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

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

Regression results reveal coefficients of a₀ = 0 and a₁ = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.

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

Sensitivity analysis allows for all of the following except:

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.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 9: Forecasting Exchange Rates

Foreign exchange markets are generally found to be at least ____ efficient.

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

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

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.

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

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:​

A regression analysis of the Australian dollar value on the inflation differential between the United States and Australia produced a coefficient of .8. Thus, for every 1 percent increase in the inflation differential, the Australian dollar is expected to depreciate by .8 percent.

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

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.

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

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. a.True b.False

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.

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

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

Regression results reveal coefficients of a₀ = 0 and a₁ = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.

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

Sensitivity analysis allows for all of the following except:​

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.

Multinational Financial Management: An Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships among Inflation, Interest Rates, and Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:

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

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

Sensitivity analysis allows for all of the following except:

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.