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}=a_{0}+a_{1} F_{t-1}+µ t $
Where is the spot rate of the pound in year t and is the forward rate of the pound in year t-1.Regression results reveal coefficients of 0 and 1.3.Thus,Gamma has reason to believe that its past forecasts have ______________ the realized spot rate.
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 $ a_{0}=0 $ and $ a_{1}=1.3 $. Thus, Gamma has reason to believe that its past forecasts have the realized spot rate.

Question

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}=a_{0}+a_{1} F_{t-1}+µ t $
Where is the spot rate of the pound in year t and is the forward rate of the pound in year t-1.Regression results reveal coefficients of 0 and 1.3.Thus,Gamma has reason to believe that its past forecasts have ______________ the realized spot rate.
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 $ a_{0}=0 $ and $ a_{1}=1.3 $. Thus, Gamma has reason to believe that its past forecasts have the realized spot rate.

Quizplus · Accepted Answer

The coefficient $ a_{1} = 1.3 $ suggests that the forward rate forecasts have consistently underestimated the realized spot rate, as the coefficient is greater than 1, indicating a systematic bias in the forecasts.

Gamma Corporation Has Incurred Large Losses Over the Last Ten St=a0+a1Ft−1+µt S_{t}=a_{0}+a_{1} F_{t-1}+µ t St​=a0​+a1​Ft−1​+µt

Gamma Corporation Has Incurred Large Losses Over the Last Ten $S_{t}=a_{0}+a_{1} F_{t-1}+µ t$