Deck 9: Forecasting Exchange Rates

Question 1

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

Answer 1

True

Question 2

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

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

Answer 2

B

Question 3

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

A) substantial; similar
B) substantial; very different
C) close to zero; similar
D) close to zero; very different

Answer 3

C

Question 4

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 -0.5, and the coefficient of the inflation differential variable is 0.4. Which of the following is true?

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 5

The absolute forecast error of a currency is ____, on average, in periods when the currency is more ____.

A) lower; volatile
B) higher; stable
C) lower; stable
D) none of the above

Question 6

MNCs can forecast exchange rate volatility to determine the potential range surrounding their exchange rate forecast.

Question 7

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.

Question 8

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

Question 9

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

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

Question 10

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

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

Question 11

Assume that interest rate parity holds. The UK five-year interest rate is 5% annualized, and the Brazilian five-year interest rate is 8% annualized. Today's spot rate of the Brazilian real is £0.25. What is the approximate five-year forecast of the real's spot rate if the five-year forward rate is used as a forecast?

A) £0.2431
B) £0.2571
C) £0.2878
D) £0.2165
E) £0.2175

Question 12

When measuring forecast performance of different currencies, it is often useful to adjust for their relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.

Question 13

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is £0.61. The spot rate forecasted for one year ahead is:

A) £0.5734.
B) £0.4032.
C) £0.5467.
D) £0.4982.
E) none of the above.

Question 14

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

A) technical
B) fundamental
C) market-based
D) none of the above

Question 15

Which of the following is the common exchange rate forecasting technique?

A) Technical forecasting
B) Fundamental forecasting.
C) Market-based forecasting
D) All of the above

Question 16

If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be very accurate.

Question 17

Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

A) Fundamental forecasting
B) Market-based forecasting
C) Technical forecasting
D) Mixed forecasting

Question 18

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

A) underestimated the future exchange rates over time.
B) overestimated the future exchange rates over time.
C) forecasted future exchange rates accurately.
D) forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

Question 19

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.

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

Question 20

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

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

Question 21

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

Question 22

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

Question 23

Silicon ltd has forecasted the Canadian dollar for the most recent period to be £0.47. The realized value of the Canadian dollar in the most recent period was £0.45. Thus, the absolute forecast error as a percentage of the realized value was ____% to the nearest 1/10th %.

A) 4.0
B) 0.4
C) 4.4
D) -4.0

Question 24

Foreign exchange markets appear to be strong-form efficient.

Question 25

A fundamental forecast that uses multiple values of the influential factors is an example of:

A) sensitivity analysis.
B) discriminant analysis.
C) technical analysis.
D) factor analysis.

Question 26

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

A) Accounting-based forecasting
B) Technical forecasting
C) Fundamental forecasting
D) Market-based forecasting

Question 27

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?

A) Fundamental forecasting
B) Market-based forecasting
C) Technical forecasting
D) Mixed forecasting

Question 28

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

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

Question 29

Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate?

A) Fundamental forecasting
B) Market-based forecasting
C) Technical forecasting
D) Mixed forecasting

Question 30

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) Fundamental forecasting
B) Market-based forecasting
C) Technical forecasting
D) Mixed forecasting

Question 31

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.

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

Question 32

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

Question 33

If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.

A) technical forecast technique
B) fundamental forecast technique
C) none of the above
D) all of the above

Question 34

If the one-year forward rate for the dollar is 0.80 euro, while the current spot rate is 0.82 euro, the expected percentage change in the euro is ____% to the nearest percentage.

A) 0.03
B) 0.02
C) -0.02
D) None of the above

Question 35

Which of the following is true according to the text?

A) Forecasts in recent years have been very accurate.
B) Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
C) Forecasting errors are smaller when focused on longer term periods.
D) None of the above.

Question 36

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.

Question 37

The US 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 dollar is 0.80 euro. Using purchasing power parity, the expected spot rate at the end of one year is ____ euro to the nearest cent.

A) 0.81
B) 0.79
C) 0.80
D) None of the above

Question 38

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

Question 39

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

Question 40

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

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

Question 41

Assume that the UK 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:

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 42

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

A) Using the absolute forecast error as a percentage of the realized value.
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 43

A regression analysis of the Australian dollar value on the inflation differential between the UK and Australia produced a coefficient of 0.8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by 0.8%.

Question 44

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

Question 45

Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.

Question 46

Severus SPA (Italy). has to pay 5 million Canadian dollars for supplies it recently received from Canada. Today, the Canadian dollar has appreciated by 2 percent against the euro. Severus has determined that whenever the Canadian dollar appreciates against the euro by more than 1 percent, it experiences a reversal of 40 percent of that movement on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.

A) depreciate by 0.8%; today
B) depreciate by 0.8%; tomorrow
C) appreciate by 0.8%; today
D) appreciate by 0.8%; tomorrow

Question 47

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

Question 48

The most sophisticated forecasting techniques provide consistently accurate forecasts.

Question 49

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

Question 50

Which of the following is true?

A) Nominal forecast errors cannot be negative.
B) Nominal forecast errors are negative when the forecasted rate exceeds the realized rate.
C) Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.
D) None of the above.