Question 1

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

When the interest rate of a foreign country is similar to that of the U.S., the forward rate premium or discount will be close to zero. This means that the forward rate and spot rate will provide similar forecasts.

Question 2

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 3

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, meaning that all publicly available information is quickly and accurately reflected in exchange rates. However, there is still some debate among economists about the level of efficiency in these markets.

Question 4

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

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

Question 5

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

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.

Question 6

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,Huge Corp.has forecasted the _______________ more accurately by ____________%.
A) yen;6.19%
B) Australian dollar;6.19%
C) yen;5.34%
D) Australian dollar;5.34%
E) none of the above

Accepted Answer

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

Question 7

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 8

Sulsa Inc.uses fundamental forecasting.Using regression analysis,it has determined the following equation for the euro:
$ \begin{aligned} \text { euro }_{t} &=b_{0}+b I N t_{t-1}+b_{2} I N C_{t-1} \ &=.005+.9 I N F_{t-1}+1.1 I N C_{t-1} \end{aligned} $
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 analysis,it has...

Question 9

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 not a method of forecasting exchange rate volatility. It is a method of assessing the accuracy of a forecast. The other options listed are all methods of forecasting exchange rate volatility.

Question 10

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 higher inflation rates will have higher nominal interest rates. Therefore, in high-inflation countries, the forward rate, which accounts for the expected inflation rate, should provide more accurate forecasts for currencies. Additionally, if interest rate parity holds, the forward rate should also equalize the interest rates between the two currencies, making it a more reliable indicator of future exchange rates.

Question 11

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

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 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 ______%.
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

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

If the MNC invests excess cash in a foreign country, it would like the foreign currency to appreciate so that it can get more returns in its home currency. However, if the MNC issues bonds denominated in a foreign currency, it would like the foreign currency to depreciate so that it can repay the bonds using less of its home currency. Therefore, the best answer is A where the MNC would like the foreign currency to appreciate when investing and depreciate when issuing bonds.

Question 14

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, it will cross the threshold of a 1 percent change, triggering a reversal. This means that the Canadian dollar is expected to depreciate by 40% of the 2% appreciation, which is 0.8%, on the following day. Therefore, Severus would prefer to make the payment tomorrow when the Canadian dollar is expected to depreciate by 0.8% to save money on the payment.

Question 15

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 16

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 17

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 forecasting technique.

Question 18

The following regression model was estimated by Delta Corporation to forecast the value of the Indian rupee (INR):
$$
I N R_{t}=a_{0}+a_{1} I N T_{t}+a_{2} I N F_{t-1}+\mu_{t}
$$
where INR is the quarterly change in the rupee, $ I N T $ is the real interest rate differential in period $ t $ between the U.S. and India, and $ I N F $ is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of $ a_{0}=.003 ; a_{1}=-.5 $; and $ a_{2}=.8 $. Assume that $ I N F_{t-1}=2 \% $. However, the interest rate differential is not known at the beginning of period $ t $ and must be estimated. Delta Corp. has 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 by...

Question 19

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 20

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 growth, inflation, and interest rates are fundamental factors that affect market behavior and therefore are necessary to consider in fundamental forecasting. Technical forecasting focuses more on analyzing market trends and using statistical models, while market-based forecasting considers factors such as supply and demand and investor sentiment. None of these methods can fully ignore fundamental factors such as economic growth, inflation, and interest rates.

Quiz 9: Forecasting Exchange Rates

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.

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

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

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 $________.

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

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 following regression model was estimated to forecast the value of the Malaysian ringgit (MYR) :

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 ______%.

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 __.

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.

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

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

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

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