Deck 9: Forecasting Exchange Rates

Question 1

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:

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.

Answer 1

A

Question 2

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

A) The interest rate variable is inversely related to the exchange rate, and the inflation variable is directly (posi tively) 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.

Answer 2

B

Question 3

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.

Answer 3

D

Question 4

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 5

Which of the following is not a limitation of fundamental forecasting

A) uncertain timing of impact.
B) forecasts are needed for factors that have a lagged impact.
C) omission of other relevant factors from the model.
D) possible change in sensitivity of the forecasted variable to each factor over time.
E) none of the above

Question 6

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 7

If a particular currency is consistently declining substantially over time,then a marketbased 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 overesti mating.

Question 8

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 9

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 10

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

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 11

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 12

Assume the following information:
Predicted Value of Realized Value of
Period New Zealand Dollar 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:

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

Question 13

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 14

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 15

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 16

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

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

Question 17

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 $.80.  The spot rate forecasted for one year ahead is:

A) $.860.
B) $.848.
C) $.740.
D) $.752.
E) none of the above

Question 18

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 19

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.

Question 20

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 21

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.

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

Question 22

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 23

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

Question 24

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 ______%.

A) 9.6
B) -9.6
C) 8.8
D) -8.8

Question 25

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:
Where is the spot rate of the pound in year t and is the forward rate of the pound in year t-1.Regression results reveal coefficients of 0 and 1.3.Thus,Gamma has reason to believe that its past forecasts have ______________ the realized spot rate.

A) overestimated
B) underestimated
C) correctly estimated
D) none of the above

Question 26

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,Huge Corp.has forecasted the _______________ more accurately by ____________%.

A) yen;6.19%
B) Australian dollar;6.19%
C) yen;5.34%
D) Australian dollar;5.34%
E) none of the above

Question 27

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 $________.

A) 1.02
B) 1.03
C) 1.04
D) none of the above

Question 28

Sulsa Inc.uses fundamental forecasting.Using regression analysis,it has determined the following equation for the euro:

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 _______%.

A) appreciation;3.4
B) depreciation;3.4
C) appreciation;0.7
D) appreciation;1.2

Question 29

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 30

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 31

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

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

Question 32

If the one-year forward rate for the euro is $1.07,while the current spot rate is $1.05,the expected percentage change in the euro is ______%.

A) 1.90
B) 2.00
C) -1.87
D) none of the above

Question 33

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 34

Severus Co.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 U.S.dollar.Severus has determined that whenever the Canadian dollar appreciates against the U.S.dollar by more than 1 percent,it experiences a reversal of 40 percent 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 .8%;today
B) depreciate by .8%;tomorrow
C) appreciate by .8%;today
D) appreciate by .8%;tomorrow

Question 35

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 36

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 37

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 38

The following regression model was estimated by Delta Corporation to forecast the value of the Indian rupee (INR):

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

Question 39

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 40

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 41

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

Question 42

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

Question 43

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

Question 44

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%.

Question 45

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 46

Foreign exchange markets appear to be strong-form efficient.

Question 47

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

Question 48

The most sophisticated forecasting techniques provide consistently accurate forecasts.

Question 49

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

Question 50

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 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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.

Question 56

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

Question 57

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

Question 58

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