Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 ____%.

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 3

According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:

Accepted Answer

A)  currencies exhibited about the same mean forecast errors as a percent of the realized value. 
B)  the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies. 
C)  the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies. 
D)  none of the above 
A)  currencies exhibited about the same mean forecast errors as a percent of the realized value. 
B)  the Canadian dollar can be forecasted by U.S. firms with greater accuracy than other currencies. 
C)  the Swiss franc can be forecasted by U.S. firms with greater accuracy than other currencies. 
D)  none of the above

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. 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 6

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

Accepted Answer

A)  to decide in which foreign market to invest the excess cash. 
B)  to decide where to borrow at the lowest cost. 
C)  to determine whether to require the subsidiary to remit the funds or invest them locally. 
D)  to speculate on the exchange rate movements. 
A)  to decide in which foreign market to invest the excess cash. 
B)  to decide where to borrow at the lowest cost. 
C)  to determine whether to require the subsidiary to remit the funds or invest them locally. 
D)  to speculate on the exchange rate movements.

Question 7

Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the following equation for the euro:
$$\begin{aligned}
\text { euro } _ { t } & = b _ { 0 } + b _ { 1 } I N F _ { t - 1 } + b _ { 2 } I N C _ { t - 1 } \
& = .005 + .9 I N F _ { t - 1 } + 1.1 I N C _ { t - 1 }
\end{aligned}$$
The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.

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 8

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.

Accepted Answer

A)  weak-form efficiency 
B)  semistrong-form efficiency 
C)  strong-form efficiency 
D)  A and B 
E)  B and C 
A)  weak-form efficiency 
B)  semistrong-form efficiency 
C)  strong-form efficiency 
D)  A and B 
E)  B and C

Question 9

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 10

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

Accepted Answer

A)  Using the absolute forecast error as a percentage of the realized value to improve your forecast. 
B)  Using the volatility of historical exchange rate movements as a forecast for the future. 
C)  Using a time series of volatility patterns in previous periods. 
D)  Deriving the exchange rate's implied standard deviation from the currency option pricing model. 
A)  Using the absolute forecast error as a percentage of the realized value to improve your forecast. 
B)  Using the volatility of historical exchange rate movements as a forecast for the future. 
C)  Using a time series of volatility patterns in previous periods. 
D)  Deriving the exchange rate's implied standard deviation from the currency option pricing model.

Question 11

Assume the following information:
$\begin{array}{ccc}
\text { Period } & \begin{array}{c}
\text { Predicted Value of } \
\text { New Zealand Dollar }
\end{array} & \begin{array}{c}
\text { Realized Value of } \
\text { New Zealand Dollar }
\end{array} \
1 & \$ .52 & \$ .50 \
2 & .54 & .60 \
3 & .44 & .40 \
4 & .51 & .50
\end{array}$

Given this information, the mean absolute forecast error as a percentage of the realized value is about:

Accepted Answer

A)  1.5%. 
B)  26%. 
C)  6%. 
D)  6.5%. 
E)  none of the above 
A)  1.5%. 
B)  26%. 
C)  6%. 
D)  6.5%. 
E)  none of the above

Question 12

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.

Accepted Answer

A)  lower; sell; upward 
B)  lower; sell; downward 
C)  higher; sell; upward 
D)  higher; sell; downward 
A)  lower; sell; upward 
B)  lower; sell; downward 
C)  higher; sell; upward 
D)  higher; sell; downward

Question 13

A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:

Accepted Answer

A)  $0.023. 
B)  $0.021. 
C)  $0.020. 
D)  None of the above 
A)  $0.023. 
B)  $0.021. 
C)  $0.020. 
D)  None of the above

Question 16

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

Accepted Answer

A)  $.840 
B)  $.890 
C)  $.856 
D)  $.854 
A)  $.840 
B)  $.890 
C)  $.856 
D)  $.854

Question 17

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?

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 18

Foreign exchange markets appear to be strong-form efficient.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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.

Accepted Answer

A) True 
 B)False

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

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 ____%.

According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:

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.

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

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

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.

Sensitivity analysis allows for all of the following except:

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

Assume the following information: Period Predicted Value of New Zealand Dollar Realized Value of New Zealand Dollar 1 \ .52 \ .50 2 .54 .60 3 .44 .40 4 .51 .50 Given this information, the mean absolute forecast error as a percentage of the realized value is about:

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.

A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.

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

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?

Foreign exchange markets appear to be strong-form efficient.

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.

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

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

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 ____%.

According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:

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.

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

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

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.

Sensitivity analysis allows for all of the following except:

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

Assume the following information: Period Predicted Value of New Zealand Dollar Realized Value of New Zealand Dollar 1 \ .52 \ .50 2 .54 .60 3 .44 .40 4 .51 .50 Given this information, the mean absolute forecast error as a percentage of the realized value is about:

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.

A forecasting technique based on fundamental relationships between economic variables and exchange rates, such as inflation, is referred to as technical forecasting.

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

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?

Foreign exchange markets appear to be strong-form efficient.

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.

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

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.