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 = a₀ + a₁Ft _-1 + mt,
Where S_t is the spot rate of the pound in year t and Ft _-1 is the forward rate of the pound in year t - 1. Regression results reveal coefficients of a₀ = 0 and a₁ = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.

Question

Quizplus · Accepted Answer

The coefficient a₁ = 1.3 indicates that the forward rate systematically underestimated the realized spot rate, as a coefficient greater than 1 suggests that the actual spot rate was higher than the forecasted rate.

Gamma Corporation Has Incurred Large Losses Over the Last Ten