Question 1

Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.

Accepted Answer

Market-based forecasting relies on market indicators such as interest rates and stock market trends rather than fundamental economic variables.

Question 2

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:​

Accepted Answer

This is because weak-form efficiency only takes into account past prices and trends, but not all public information, which implies that the current exchange rate does not include all the relevant information, and therefore the market is not fully efficient.

Question 3

Which of the following is not a limitation of technical forecasting?​

Accepted Answer

Technical forecasting is particularly suited for short-term forecasts, especially when currencies exhibit continuous trends. It analyzes past market data to predict future price movements, making it applicable for currencies with short-term trends.

Question 4

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?​

Accepted Answer

Speculation on exchange rate movements is not a major reason for MNCs to forecast exchange rates as it is not directly related to their operations or investments in foreign markets. Instead, MNCs primarily need to forecast exchange rates to make strategic decisions such as where to invest excess cash, where to borrow at the lowest cost, and whether to require a subsidiary to remit funds or invest them locally.

Question 5

If graphical points lie above the perfect forecast line, then the forecast overestimated the future value.

Accepted Answer

In a graphical representation, if points lie above the perfect forecast line, it indicates that the actual values were higher than the forecasted values, meaning the forecast underestimated, not overestimated, the future value.

Question 6

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:​

Accepted Answer

According to the international Fisher effect, the difference in interest rates between two countries should reflect in the exchange rate. In this case, since the UK has a higher interest rate than the US, the expected exchange rate would reflect a depreciation in the pound's value (i.e., it will take more pounds to buy one dollar).

Question 7

Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs.

Accepted Answer

Establishing individual exchange rate forecasts by different departments can lead to inconsistencies and inefficiencies. It's more effective for an MNC to have a centralized approach to forecasting exchange rates to ensure coherence and alignment with the overall financial strategy.

Question 8

A regression model was applied to explain movements in the Canadian dollar's value over time. The coefficient for the inflation differential between the United States and Canada was -0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.

Accepted Answer

According to the information given in the question, when the inflation differential between the United States and Canada increases, the coefficient is 0.2 which suggests that the Canadian dollar would depreciate. Similarly, when the interest rate differential between the United States and Canada decreases, the coefficient is 0.8 which also suggests that the Canadian dollar would depreciate. Therefore, the answer is C - the Canadian dollar depreciates when the inflation differential increases and the interest rate differential decreases.

Question 9

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Accepted Answer

The forward rate inherently includes expectations about the future nominal interest rates between two countries, as it is determined by the interest rate differential between them. This means it can reflect expectations about inflation and provide forecasts for currency movements, including in high-inflation environments.

Question 10

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:​

Accepted Answer

According to the purchasing power parity (PPP) theory, the currency of the country with a higher inflation rate is expected to depreciate. Since the U.S. has a higher inflation rate (8%) compared to Japan (5%), the PPP theory would forecast an appreciation of the yen's value over the next year.

Question 11

If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.

Accepted Answer

In an efficient foreign exchange market, regardless of the level (weak-form, semistrong-form, or strong-form), current prices reflect all available information. Therefore, technical analysis, which relies on historical price and volume data, would not provide an advantage in forecasting future exchange rate movements.

Question 12

The following regression model was estimated to forecast the percentage change in the Australian dollar (AUD): Where AUD is the quarterly change in the Australian dollar, INT is the real interest rate differential in period t between the United States and Australia, and INF is the inflation rate differential between the United States and Australia in the previous period. Regression results indicate coefficients of a₀=.001; a₁=-.8; and a₂=.5. Assume that INF_t - 1 = 4%. 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: There is a 20 percent probability that the Australian dollar will change by ____, and an 80 percent probability it will change by ____.

Accepted Answer

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

Question 13

Sensitivity analysis allows for all of the following except:​

Accepted Answer

Sensitivity analysis is a tool used to analyze the effect of varying input assumptions on an output result. It allows for accountability for uncertainty by considering a range of possible future values and alternative scenarios. However, it does not focus on a single point estimate of future exchange rates.

Question 14

If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.

Accepted Answer

If speculators expect the spot rate of the yen to be higher than the 60-day forward rate, they will buy the yen forward, anticipating its value to increase, which puts upward pressure on the yen's forward rate due to increased demand.

Question 15

Assume that U.S. interest rates for the next three years are 5 percent, 6 percent, and 7 percent, respectively. Also assume that Canadian interest rates for the next three years are 3 percent, 6 percent, and 9 percent. The current Canadian spot rate is $.840. What is the approximate three-year forecast of the Canadian dollar's spot rate if the three-year forward rate is used as a forecast?​

Accepted Answer

The three-year forward rate should reflect the difference in interest rates between the U.S. and Canada.

Using the interest rate parity formula:

Forward rate = Spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)

For the 1-year forward rate: 
- 1-year U.S. interest rate = 5%, 1-year Canadian interest rate = 3%
- Forward rate = $.840 x (1 + .03) / (1 + .05) = $.856

This calculation needs to be done for all three years, but since the interest rate differentials between the U.S. and Canada are the same each year (2%), the forward rate for each year will be the same percentage higher than the spot rate.

Therefore, the approximate three-year forecast for the Canadian dollar's spot rate using the three-year forward rate as a forecast is:

$.840 x (1 + .02)^3 = $.854

Question 16

Purchasing power parity is used in:​

Accepted Answer

Purchasing power parity is used in fundamental forecasting, which is a method of predicting future stock prices based on economic and financial data. Technical forecasting uses historical market data to predict future market trends, while market-based accounting is a method of valuation that uses market prices as a basis for determining the value of assets and liabilities.

Question 17

If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.

Accepted Answer

If speculators expect the spot rate to be lower than the forward rate, they will sell Canadian dollars forward, putting downward pressure on the Canadian dollar forward rate.

Question 18

Leila Corp. used the following regression model to determine if the forecasts over the last ten years were biased: $ S_{t}=a_{0}+a_{1} F_{t}-1+\mu t $, where St is the spot rate of the yen in year t and F_t - 1 is the forward rate of the yen in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corp. has reason to believe that its past forecasts have ____ the realized spot rate.

Accepted Answer

The coefficient of a₁ = 0.30 indicates that for every 1% increase in the forward rate, the spot rate increased by only 0.30%. This means that the forecasts were overestimating the actual spot rate, as the actual increase was less than what was predicted.

Question 19

When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate.
a.True
b.False

Accepted Answer

The decision to establish a subsidiary in a foreign country depends on various factors such as market potential, economic stability, political environment, competitive landscape, and exchange rate stability. Appreciation of the foreign currency alone cannot be the sole determinant for accepting the project as it may lead to higher export costs, reduced competitiveness, and decreased profitability in the long run. Therefore, the statement is false.

Question 20

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

Accepted Answer

Market-based forecasting uses forward rates as an indicator of future spot rates. A forward rate for a specific date in the future reflects the market's expectation of the spot rate on that future date. Therefore, it can be used as a forecasted spot rate for that future date.

Quiz 9: Forecasting Exchange Rates

Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:

Which of the following is not a limitation of technical forecasting?

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

If graphical points lie above the perfect forecast line, then the forecast overestimated the future value.

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs.

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:

If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.

Sensitivity analysis allows for all of the following except:

If speculators expect the spot rate of the yen in 60 days to be than the 60-day forward rate on the yen, they will the yen forward and put pressure on the yen's forward rate.

Purchasing power parity is used in:

If speculators expect the spot rate of the Canadian dollar in 30 days to be than the 30-day forward rate on Canadian dollars, they will Canadian dollars forward and put pressure on the Canadian dollar forward rate.

When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate. a.True b.False

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

Quiz 9: Forecasting Exchange Rates

Market-based forecasting is based on fundamental relationships between economic variables and exchange rates.

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:​

Which of the following is not a limitation of technical forecasting?​

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?​

If graphical points lie above the perfect forecast line, then the forecast overestimated the future value.

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:​

Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs.

Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:​

If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting exchange rate movements.

Sensitivity analysis allows for all of the following except:​

If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.

Purchasing power parity is used in:​

If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.

When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it will always accept that project if the foreign currency is expected to appreciate. a.True b.False

In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the forecasted spot rate on that future date.

If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but not all relevant public information, then the Canadian dollar market is:

Which of the following is not a limitation of technical forecasting?

Which of the following is not one of the major reasons for MNCs to forecast exchange rates?

Assume that U.S. interest rates are 6 percent, while British interest rates are 7 percent. If the international Fisher effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:

Assume that U.S. annual inflation equals 8 percent, while Japanese annual inflation equals 5 percent. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:

Sensitivity analysis allows for all of the following except:

If speculators expect the spot rate of the yen in 60 days to be than the 60-day forward rate on the yen, they will the yen forward and put pressure on the yen's forward rate.

Purchasing power parity is used in:

If speculators expect the spot rate of the Canadian dollar in 30 days to be than the 30-day forward rate on Canadian dollars, they will Canadian dollars forward and put pressure on the Canadian dollar forward rate.