Question 1

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

Accepted Answer

Technical forecasting relies on the assumption that historical price movements and patterns can predict future price movements, so if the pattern appears random, technical forecasting may not be effective.

Question 2

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

Accepted Answer

If a foreign currency is expected to weaken against the parent's currency, the parent may prefer to expedite the remittance of subsidiary earnings to take advantage of the current stronger value of the foreign currency before it weakens.

Question 3

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

Accepted Answer

MNCs can use various methods to forecast exchange rate volatility, such as historical data analysis, statistical models, and expert opinions, to determine the potential range surrounding their exchange rate forecast. This helps them to assess their risk exposure and make informed decisions regarding international transactions and investments.

Question 4

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

Accepted Answer

If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount will be close to zero. This means that the forward rate and the spot rate will provide similar forecasts as there is no significant difference between the spot and forward rates.

Question 5

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

Accepted Answer

Factors such as economic growth, inflation, and interest rates are fundamental factors that impact the financial markets and the performance of individual assets. Therefore, they are integral to fundamental forecasting, which uses economic and financial data to analyze and predict market trends and asset valuations. Technical forecasting, on the other hand, relies on price and volume data to identify patterns and trends in market behavior. Market-based forecasting refers to the use of market data to predict future market behavior. None of the above is not a valid choice, as these factors do impact financial forecasting.

Question 6

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

Accepted Answer

Using the absolute forecast error as a percentage of the realized value is a method of measuring the accuracy of a forecast, not a method of forecasting exchange rate volatility. The other options are all methods of forecasting exchange rate volatility.

Question 7

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

Accepted Answer

The absolute forecast error of a currency is typically lower in periods when the currency is more stable. This is because stable periods exhibit less unexpected fluctuation, making forecasting more accurate and errors smaller.

Question 8

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

Accepted Answer

According to the purchasing power parity theory, the exchange rate between two currencies should equalize the price of a basket of goods and services in each country. Therefore, the expected exchange rate at the end of one year can be calculated as:

Expected exchange rate = Current exchange rate x (1 + Domestic inflation rate) / (1 + Foreign inflation rate)
Expected exchange rate = 1.03 x (1 + 0.04) / (1 + 0.03) = 1.04

Therefore, the expected spot rate at the end of one year is $1.04.

Question 9

The following regression model was estimated to forecast the value of the Indian rupee (INR): Where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the United States and India, and INF is the inflation rate differential between the United States and India in the previous period. Regression results indicate coefficients of a₀ = .003; a₁ = -.5; and a₂ = .8. Assume that INF_t - 1 = 2 percent. 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: The expected change in the Indian rupee in period t is: A)3.40 percent. B)0.40 percent. C)3.10 percent. D)1.70 percent. E)none of the above

Accepted Answer

The answer of The following regression model was estimated to...

Question 10

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

Accepted Answer

When an MNC invests excess cash in a foreign country, it would like the foreign currency to appreciate as this would result in the MNC making a greater return on its investment when it converts the foreign currency back into its home currency. On the other hand, when an MNC issues bonds denominated in a foreign currency, it would like the foreign currency to depreciate as this would reduce the MNC's cost of servicing the debt.

Question 11

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

Accepted Answer

In an efficient foreign exchange market, regardless of the level (weak-form, semistrong-form, or strong-form), historical and current exchange rate information is considered to be already reflected in current exchange rates, making it not useful for forecasting future movements.

Question 12

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

Accepted Answer

The expected percentage change in the euro is calculated as ((Forward Rate - Spot Rate) / Spot Rate) * 100 = (($1.07 - $1.05) / $1.05) * 100 = 1.90%.

Question 13

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

Accepted Answer

Inflation and interest rate differentials are important factors that are commonly used in fundamental forecasting to assess the economic health of a country, and to predict future trends in the currency exchange rate.

Question 14

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 ____ percent.
A)9.6
B)-9.6
C)8.8
D)-8.8

Accepted Answer

The answer of Silicon Co. has forecasted the Canadian dollar...

Question 15

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 United States and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the United States and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____ percent.
A)appreciation; 3.4
B)depreciation; 3.4
C)appreciation; 0.7
D)appreciation; 1.2

Accepted Answer

The answer of Sulsa Inc. uses fundamental forecasting. Using regression...

Question 16

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.

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

Accepted Answer

The coefficient of a₁ being greater than 1 means that the past forecasts have been underestimating the realized spot rate. This means that the actual spot rate has been higher than what Gamma has been forecasting.

Question 17

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

Accepted Answer

According to the international Fisher effect, currencies with high inflation rates should depreciate in the long run relative to low-inflation currencies. However, interest rate parity suggests that the forward rate should accurately predict the future spot rate, taking into account interest rate differentials between two currencies. Therefore, if both of these theories hold, the forward rate should be the more accurate forecast for currencies in high-inflation countries, as it incorporates the expected depreciation from the international Fisher effect.

Question 18

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

The answer of Corporations tend to make only limited use...

Question 19

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

Accepted Answer

- Since the Canadian dollar has appreciated by 2 percent against the U.S. dollar, Severus would have to pay more U.S. dollars to cover the 5 million Canadian dollar payment.
- However, Severus has determined that a change of more than 1 percent in the exchange rate will experience a reversal of 40 percent on the following day. So, a 2 percent appreciation today would result in a 0.8 percent depreciation tomorrow.
- Therefore, Severus would prefer to make the payment tomorrow when the Canadian dollar is expected to depreciate by 0.8 percent, so it can cover the payment at a lower cost in U.S. dollars.

Question 20

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

Accepted Answer

Foreign exchange markets are generally found to be at least weak-form efficient, meaning that past price movements and historical data are already reflected in current exchange rates, making it difficult to predict future movements based on this information alone.

Quiz 9: Forecasting Exchange Rates

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

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

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

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.

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

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

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

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 $____.

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 .

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

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 ____ percent.

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

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 ____ percent.

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.

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.

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.

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

Quiz 9: Forecasting Exchange Rates

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

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

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

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.

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

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

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

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 $____.

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 ____.

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

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 ____ percent.

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

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 ____ percent.

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.

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.

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.

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

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

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?

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

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 .

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.