Question 1

Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased: St = a0 + a1Ft  -  1 + $\mu$t,
Where St is the spot rate of the yen in year t and Ft  -  1 is the forward rate of the yen in year t-1. Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation 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 2

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 3

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.

Question 4

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 ____%.

Accepted Answer

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

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

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

Question 12

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

Exam 9: Forecasting Exchange Rates

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:

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

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 ____%.

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?

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

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

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

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.

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

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.

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