Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is true?

Accepted Answer

A) Forecast errors cannot be negative. 
B) 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 3

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

Accepted Answer

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

Question 4

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.

Accepted Answer

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

Question 5

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

Question 6

The potential forecast error is larger for currencies that are more volatile.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is true regarding forecast errors?

Accepted Answer

A) Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency. 
B) Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems. 
C) Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries. 
D) B and C

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

Accepted Answer

A) $.860. 
B) $.848. 
C) $.740. 
D) $.752.

Question 10

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 the spot rate will provide ____ forecasts.

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 of that change on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.

Accepted Answer

A) depreciate by .8 percent; today 
B) depreciate by .8 percent; tomorrow 
C) appreciate by .8 percent; today 
D) appreciate by .8 percent; tomorrow

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 
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 15

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.

Question 16

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

Question 17

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. 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 the pound's value over the next year. 
B) depreciation of the pound's value over the next year. 
C) no change in the pound's value over the next year. 
D) not enough information to answer this question.

Question 18

When the value of an influential factor from the prior period 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

Question 19

The most sophisticated forecasting techniques provide consistently accurate forecasts.

Accepted Answer

A) True 
 B)False

Question 20

In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.

Accepted Answer

A) True 
 B)False

Exam 9: Forecasting Exchange Rates

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

Which of the following is true?

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

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

The potential forecast error is larger for currencies that are more volatile.

Which of the following is true regarding forecast errors?

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.

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

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 the spot rate will provide forecasts.

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

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

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

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 .

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

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

The most sophisticated forecasting techniques provide consistently accurate forecasts.

In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.

Exam 9: Forecasting Exchange Rates

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

Which of the following is true?

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

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

The potential forecast error is larger for currencies that are more volatile.

Which of the following is true regarding forecast errors?

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.

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

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 the spot rate will provide ____ forecasts.

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

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

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

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 ____.

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

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

The most sophisticated forecasting techniques provide consistently accurate forecasts.

In general, any key managerial decision that is based on forecasted exchange rates should rely completely on one forecast rather than alternative exchange rate scenarios.

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 the spot rate will provide forecasts.

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

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 .

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