Exam 9: Forecasting Exchange Rates

Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased: S_t = a₀ + a₁F_{t - 1} + $\mu$ _t, Where S_t is the spot rate of the pound in year t and F_{t - 1} is the forward rate of the pound in year t - 1. 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.

Purchasing power parity is used in:

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

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?

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

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

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

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.

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.

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

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

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?

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

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 spot rate will provide similar forecasts.

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.

Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.

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.

Which of the following is true?

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

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