Question 1

Which of the following is true?

Accepted Answer

D

Question 2

Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:

Accepted Answer

SOLUTION:$.80 × [1 + (-6%)] = $.752

Question 3

According to the text, research generally supports ____ in foreign exchange markets.

Accepted Answer

Research generally supports weak-form and semistrong-form efficiency in foreign exchange markets.

Question 4

According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:

Accepted Answer

The answer of According to the text, the analysis of...

Question 5

Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:

Accepted Answer

According to interest rate parity, the difference in interest rates between two countries should equal the expected change in their exchange rate. Since Australia's interest rate is higher than the US, the expected change in the exchange rate should be in favor of the US dollar. Therefore, the Australian dollar is expected to depreciate against the US dollar over the next year.

Question 6

If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:

Accepted Answer

If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then the international Fisher effect (IFE) is supported. The IFE states that the difference in interest rates between two countries will be equal to the difference in their inflation rates. Therefore, if interest rate parity holds and the forward rate is an unbiased estimate of the future spot rate, then the IFE must also hold. Covered interest arbitrage may or may not be feasible depending on the specific interest rates and foreign exchange rates involved, and the average absolute error from forecasting may or may not equal zero depending on the accuracy of the forecasting method used.

Question 7

Assume a forecasting model uses inflation differentials and interest rate differentials to forecast the exchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?

Accepted Answer

According to the given information, the regression coefficient of the interest rate differential variable is -.5, meaning that an increase in the interest rate differential is associated with a decrease in the exchange rate. Similarly, the coefficient of the inflation differential variable is .4, indicating that an increase in the inflation differential is associated with an increase in the exchange rate. Therefore, the interest rate variable is inversely related to the exchange rate, and the inflation variable is directly related to the exchange rate. Option B correctly reflects this relationship.

Question 8

Which of the following forecasting techniques would best represent the use of today's forward exchange rate to forecast the future exchange rate?

Accepted Answer

Market-based forecasting uses current market information, such as forward exchange rates, to predict future exchange rates. Therefore, using today's forward exchange rate to forecast the future exchange rate would be an example of market-based forecasting.

Question 9

Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?

Accepted Answer

Fundamental forecasting involves using economic factors and relationships between them to forecast future exchange rates. This technique considers macroeconomic variables such as interest rates, inflation rates, and GDP growth to predict exchange rate movements, which aligns with the given scenario. Market-based forecasting relies on analyzing patterns and movements in the exchange rate market. Technical forecasting involves using past exchange rate data to identify patterns and trends to predict future movements. Mixed forecasting is a combination of different forecasting techniques.

Question 10

Assume the following information:
$\begin{array}{ccc}
\text { Period } & \begin{array}{c}
\text { Predicted Value of } \
\text { New Zealand Dollar }
\end{array} & \begin{array}{c}
\text { Realized Value of } \
\text { New Zealand Dollar }
\end{array} \
1 & \$ .52 & \$ .50 \
2 & .54 & .60 \
3 & .44 & .40 \
4 & .51 & .50
\end{array}$

Given this information, the mean absolute forecast error as a percentage of the realized value is about:

Accepted Answer

The mean absolute forecast error is the average of the absolute differences between the predicted and realized values. In this case, the absolute differences are:Period 1: |0.52 - 0.50| = 0.02Period 2: |0.54 - 0.60| = 0.06Period 3: |0.44 - 0.40| = 0.04Period 4: |0.51 - 0.50| = 0.01The mean absolute forecast error is the average of these differences, which is (0.02 + 0.06 + 0.04 + 0.01) / 4 = 0.0325.The mean absolute forecast error as a percentage of the realized value is 0.0325 / 0.50 * 100 = 6.5%.

Question 11

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

Accepted Answer

The answer of Which of the following is not a...

Question 12

If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:

Accepted Answer

A consistently declining currency indicates a trend of decreasing value over time, which means that a market-based forecast is likely to overestimate the future exchange rates over time. This is because market participants will adjust their expectations based on the trend and sell the currency, leading to a further decline in value. Therefore, the forecast will be biased towards overestimating the currency's value.

Question 13

A fundamental forecast that uses multiple values of the influential factors is an example of:

Accepted Answer

The answer of A fundamental forecast that uses multiple values...

Question 14

When the value from the prior period of an influential factor affects the forecast in the future period, this is an example of a(n):

Accepted Answer

Lagged input refers to the value from a prior period being used as an input for forecasting future periods, which is the case in the given scenario. Instantaneous input refers to an input that has an immediate effect on the forecast, while simultaneous input refers to inputs that affect the forecast at the same time period. Therefore, the correct answer is option A.

Question 15

Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

Accepted Answer

SOLUTION:
$( 1.05 ) ^ { 5 } / ( 1.08 ) ^ { 5 } - 1 = - 13 \% ; \$ .20 [ 1 + ( - 13 \% ) ] = \$ .174$

Question 16

If it was determined that the movement of exchange rates was not related to previous exchange rate values, this implies that a ____ is not valuable for speculating on expected exchange rate movements.

Accepted Answer

If exchange rate movements are not related to previous exchange rate values, technical forecasting techniques which rely on analyzing historical price and volume data would not be valuable for speculating on expected exchange rate movements. However, fundamental forecasting techniques which consider economic, political, and social factors that may impact exchange rates could still be useful. Therefore, choice B is not the best answer as fundamental forecasting techniques could still be valuable.

Question 17

If today's exchange rate reflects all relevant public information about the euro's exchange rate, but not all relevant private information, then ____ would be refuted.

Accepted Answer

The answer of If today's exchange rate reflects all relevant...

Question 18

Which of the following forecasting techniques would best represent the sole use of the pattern of historical currency values of the euro to predict the euro's future currency value?

Accepted Answer

Technical forecasting relies solely on analyzing historical patterns and trends in data to make predictions about future values. Therefore, it is the best choice for this scenario.

Question 19

Which of the following forecasting techniques would best represent sole use of today's spot exchange rate of the euro to forecast the euro's future exchange rate?

Accepted Answer

Market-based forecasting uses current market prices, such as today's spot exchange rate, to predict future exchange rates.

Question 20

Which of the following is true according to the text?

Accepted Answer

The text suggests that none of the statements A, B, or C are true. Forecasts in recent years may not have been very accurate, the absolute forecast error as a percent of the realized value may not effectively detect forecast bias, and forecasting errors are typically larger, not smaller, for longer-term periods.

Quiz 9: Forecasting Exchange Rates