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

The following regression model was estimated to forecast the value of the Indian rupee (INR):
INRt = a0 + a1INTt + a2INFt -1 + mt,
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:
$\begin{array}{cc}
\text { Probability } & \text { Possible Outcome } \
30\% & -2 \% \
40 \% & -3 \% \
30 \% & -4 \%
\end{array}$
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

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Forecast errors tend to be large for short forecast horizons.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

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

Question 7

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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:
$\begin{array}{llcc}
 \underline{ \text { Currency }} & \underline{ \text { Forecasted Value}}&\underline{ \text {Realized Value}}  \
 \text {  Australian dollar } &\$.60&\$.55\
 \text {Japanese yen  } &\$.0067&\$.0069\
\end{array}$

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

Question 10

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 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

A)  fundamental forecasting. 
B)  market-based forecasting. 
C)  technical forecasting. 
D)  mixed forecasting.

Question 16

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:

Accepted Answer

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

Question 17

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

Accepted Answer

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

Question 18

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%.

Accepted Answer

A) True 
 B)False

Question 19

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:
St = a0 + a1Ft -1 + mt,
Where St is the spot rate of the pound in year t and Ft -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.

Accepted Answer

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

Question 20

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

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.

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

Forecast errors tend to be large for short forecast horizons.

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

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

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

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

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

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

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.

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.

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.

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?

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:

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

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%.

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