Question 1

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 2

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.

Accepted Answer

Accounting-based forecasting is not mentioned in the text as a separate technique. The other three techniques - technical, fundamental, and market-based - are discussed in detail.

Question 3

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 evaluating the accuracy of forecasting, but not a method of forecasting exchange rate volatility. B, C, and D are all methods of forecasting exchange rate volatility.

Question 4

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 5

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

Accepted Answer

Absolute forecast error as a percentage of the realized value = |(forecasted value - realized value) / realized value| * 100%
= |(0.73 - 0.8) / 0.8| * 100%
= 8.75%
So the closest option is C) 8.8%.

Question 6

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 7

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

Accepted Answer

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

Question 8

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: S_t = a₀ + a₁F_t _- ₁ +$\mu$_t, Where S_t is the spot rate of the pound in year t and F_t _- 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. A) overestimated B) underestimated C) correctly estimated D) none of the above

Accepted Answer

The coefficient a₁ = 1.3 indicates that the forward rate forecasts have consistently underestimated the realized spot rate, as the coefficient is greater than 1.

Question 9

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

Economic factors such as economic growth, inflation, and interest rates are fundamental indicators that carry the potential to impact market trends and affect a company's financial performance. Therefore, they are closely analyzed by fundamental analysts who study the financial health of a company and its valuation in relation to the broader market. Technical analysis, on the other hand, focuses on the study of price and volume patterns in market data to make short-term trading decisions. Market-based forecasting incorporates analysis of market sentiment and investor behavior to predict future trends. None of the above can be considered the best answer as only fundamental analysis fits the description of analyzing economic factors.

Question 10

The following regression model was estimated to forecast the value of the Indian rupee (INR): INR_t = a₀ + a₁INT_t + a₂INF_t _- ₁ + $\mu$_t, 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 INF_t _- 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: The expected change in the Indian rupee in period t is: A) 3.40%. B) 0.40%. C) 3.10%. D) 1.70%. E) none of the above

Accepted Answer

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

Question 11

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 semistrong-form efficient. This means that all publicly available information, including historical prices and market trends, is already reflected in current exchange rates. However, some argue that there may still be opportunities for profit through the use of insider information or analysis of non-public information.

Question 12

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

Accepted Answer

If the foreign country's interest rate is similar to the U.S. rate, there will be no incentive for investors to hold the foreign currency, resulting in a close to zero forward rate premium or discount. This suggests that the forward rate and spot rate will provide similar forecasts.

Question 13

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

The international Fisher effect states that countries with high (low) interest rates should experience high (low) inflation rates. According to interest rate parity, the difference in interest rates between two countries should be reflected in the difference between the forward and spot exchange rates. Therefore, if both theories hold, the forward rate should provide the more accurate forecast for currencies in high-inflation countries.

Question 14

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR): MYR_t = a₀ + a₁INC_t _- ₁ + a₂INF_t _- ₁ + $\mu$_t, Where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a₀ = .005; a₁ = .4; and a₂ = .7. The most recent quarterly percentage change in the inflation differential is -5%, while the most recent quarterly percentage change in the income differential is 3%. Using this information, the forecast for the percentage change in the ringgit is: A) 4.60%. B) -1.80%. C) 5.2%. D) -4.60%. E) none of the above

Accepted Answer

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

Question 15

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 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 ____.
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 benefits from the foreign currency appreciating because the value of its investment increases when converted back to its home currency. Conversely, if an MNC issues bonds denominated in a foreign currency, it benefits from the foreign currency depreciating, as it will cost the company less in its home currency to repay the debt.

Question 17

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 18

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, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.
A) more accurate than
B) less accurate than
C) more biased than
D) the same as

Accepted Answer

The answer of Huge Corporation has just initiated a market-based...

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 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

Accepted Answer

If the Canadian dollar appreciates by 2 percent, its new exchange rate would be 1.02 CAD/USD. To pay its suppliers, Severus Co. would have to exchange 5 million CAD for USD, which would cost 5 million CAD / 1.02 CAD/USD = $4,901,961. If the Canadian dollar then depreciates by 0.8 percent, its new exchange rate would be 1.008 CAD/USD. Severus Co. would then receive a reversal of 40 percent, so its effective exchange rate would be 1.008 CAD/USD * (1 - 0.4) = 0.6048 CAD/USD. The cost of converting 5 million CAD at this exchange rate would be $3,024,000, which is less than the cost of converting the CAD today. Therefore, it is preferable for Severus Co. to make payment tomorrow.

Question 20

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

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%.

Quiz 9: Forecasting Exchange Rates

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

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

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

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.

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 ____%.

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 $____.

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

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

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 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.

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 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 ____%.