Which of the following is true regarding forecast errors?
A)Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency.
B)Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems.
C)Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries.
D)B and C

Question

Quizplus · Accepted Answer

B is correct because forecast errors can indeed vary based on several factors including the time horizon of the forecast, the inherent volatility of the currency in question, and the political stability of the country whose currency is being forecasted. These factors can all influence the accuracy of currency forecasts.

Which of the Following Is True Regarding Forecast Errors