Exam 9: Forecasting Exchange Rates

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

Using the inflation differential between two countries to forecast their exchange rates is not always accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.

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

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.

Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:

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

If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.

A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.

Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased: S_t = a₀ + a₁Ft -1+ m_t, Where S_t is the spot rate of the yen in year t and Ft _-1 is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.

A forecast of a currency one year in advance is typically more accurate than a forecast one week in advance since the currency reverts to equilibrium over a longer term period.

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

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

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

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

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

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR): MYR_t = a₀+ a₁INCt _-1 + a₂INFt _-1 + m_t, Where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a₀ = .005; a₁ = .4; and a₂ = .7. The most recent quarterly percentage change in the inflation differential is -5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is:

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

Monson Co., based in the U.S., 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.

The U.S. 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 euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.

Which of the following is true according to the text?