Question 1

When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):

Accepted Answer

A)  lagged input. 
B)  instantaneous input. 
C)  simultaneous input. 
D)  B and C 
A)  lagged input. 
B)  instantaneous input. 
C)  simultaneous input. 
D)  B and C

Question 2

The following regression model was estimated to forecast the value of the Indian rupee (INR): INRt = a0 + a1INTt + a2INFt  -  1 + $\mu$t,
Where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = -.5; and a2 = .8. Assume that INFt  -  1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:
  The expected change in the Indian rupee in period t is:

Accepted Answer

A)  3.40%. 
B)  0.40%. 
C)  3.10%. 
D)  1.70%. 
E)  none of the above 
A)  3.40%. 
B)  0.40%. 
C)  3.10%. 
D)  1.70%. 
E)  none of the above

Question 3

Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

Accepted Answer

A)  appreciation of pound's value over the next year. 
B)  depreciation of pound's value over the next year. 
C)  no change in pound's value over the next year. 
D)  not enough information to answer this question. 
A)  appreciation of pound's value over the next year. 
B)  depreciation of pound's value over the next year. 
C)  no change in pound's value over the next year. 
D)  not enough information to answer this question.

Question 4

Huge Corporation has just initiated a market-based forecast system using the forward rate as an estimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below are the forecasted and realized values for the last period:   According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.

Accepted Answer

A)  more accurate than 
B)  less accurate than 
C)  more biased than 
D)  the same as 
A)  more accurate than 
B)  less accurate than 
C)  more biased than 
D)  the same as

Question 5

If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.

Accepted Answer

A)  weak-form 
B)  semistrong-form 
C)  strong form 
D)  all of the above 
A)  weak-form 
B)  semistrong-form 
C)  strong form 
D)  all of the above

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR): MYRt = a0 + a1INCt  -  1 + a2INFt  -  1 + $\mu$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 = 0.005; a1 = 0.4; and a2 = 0.7. 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

Accepted Answer

A)  4.60%. 
B)  -1.80%. 
C)  5.2%. 
D)  -4.60%. 
E)  None of the above 
A)  4.60%. 
B)  -1.80%. 
C)  5.2%. 
D)  -4.60%. 
E)  None of the above

Question 8

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:

Accepted Answer

A)  depreciation in the Australian dollar's value over the next year. 
B)  appreciation in the Australian dollar's value over the next year. 
C)  no change in the Australian dollar's value over the next year. 
D)  information on future interest rates is needed to answer this question. 
A)  depreciation in the Australian dollar's value over the next year. 
B)  appreciation in the Australian dollar's value over the next year. 
C)  no change in the Australian dollar's value over the next year. 
D)  information on future interest rates is needed to answer this question.

Question 9

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 ____.

Accepted Answer

A)  appreciate; depreciate 
B)  appreciate; appreciate 
C)  depreciate; depreciate 
D)  depreciate; appreciate 
A)  appreciate; depreciate 
B)  appreciate; appreciate 
C)  depreciate; depreciate 
D)  depreciate; appreciate

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 13

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Accepted Answer

A) True 
 B)False

Question 14

Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

Accepted Answer

A)  $.131. 
B)  $.226. 
C)  $.262. 
D)  $.140. 
E)  $.174. 
A)  $.131. 
B)  $.226. 
C)  $.262. 
D)  $.140. 
E)  $.174.

Question 15

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 ____.

Accepted Answer

A)  increases; increases 
B)  decreases; increases 
C)  increases; decreases. 
D)  increases; decreases 
A)  increases; increases 
B)  decreases; increases 
C)  increases; decreases. 
D)  increases; decreases

Question 16

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 17

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 18

Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.

Accepted Answer

A)  appreciate; 16.22 
B)  depreciate; 16.22 
C)  appreciate; 6.66 
D)  depreciate; 6.66 
E)  none of the above 
A)  appreciate; 16.22 
B)  depreciate; 16.22 
C)  appreciate; 6.66 
D)  depreciate; 6.66 
E)  none of the above

Question 19

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

Accepted Answer

A)  weak-form 
B)  semistrong-form 
C)  strong form 
D)  all of the above 
A)  weak-form 
B)  semistrong-form 
C)  strong form 
D)  all of the above

Question 20

Forecast errors tend to be large for short forecast horizons.

Accepted Answer

A) True 
 B)False

When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):

Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.

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

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 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 .

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.

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

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

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

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.

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

Forecast errors tend to be large for short forecast horizons.

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

When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):

Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

If the foreign exchange market is ____ efficient, then historical and current exchange rate information is not useful for forecasting exchange rate movements.

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

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 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 ____.

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.

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

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

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

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.

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

Forecast errors tend to be large for short forecast horizons.

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 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.

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.