If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:
A) underestimated the future exchange rates over time.
B) overestimated the future exchange rates over time.
C) forecasted future exchange rates accurately.
D) forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

Question

Quizplus · Accepted Answer

If a currency is consistently declining over time, a market-based forecast will likely overestimate its future exchange rates. This is because market participants will adjust their expectations downwards, causing the currency to weaken further. As a result, a market-based forecast will likely be too optimistic and overestimate the future exchange rates of the currency.

If a Particular Currency Is Consistently Declining Substantially Over Time