Question 1

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, then technical analysis, which relies on past exchange rate patterns to predict future movements, would not be a useful strategy for speculating on expected exchange rate movements. Fundamental analysis, which examines economic and political factors that may affect exchange rates, could still be valuable in this scenario.

Question 2

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

Accepted Answer

B

Question 3

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 the current market price of an asset or security to forecast its future price. In this case, the forward exchange rate is a market-based indicator that reflects the market's expectation of future exchange rates. Therefore, using today's forward exchange rate to forecast the future exchange rate is an example of market-based forecasting.

Question 4

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

Accepted Answer

Research generally supports both weak-form and semistrong-form efficiency in foreign exchange markets. Weak-form efficiency suggests that past price movements and volume data do not predict future price movements, while semistrong-form efficiency posits that all publicly available information is already reflected in prices, making it impossible to achieve consistently higher returns.

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 forward rate should reflect the expected change in the spot rate based on the difference in interest rates between the two countries. Since Australia's interest rate is only slightly higher than the U.S. interest rate, the one-year forward rate of the Australian dollar would be expected to be slightly lower than the current spot rate. This implies a depreciation of the Australian dollar over the next year.

Question 6

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

Accepted Answer

The answer of Assume the following information:  Given this...

Question 7

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 the analysis of historical patterns and trends in data, making it the best choice for predicting future currency values based on the pattern of historical currency values of the euro. Fundamental forecasting considers macroeconomic and fundamental data, while market-based forecasting considers market signals and sentiments. Mixed forecasting combines several techniques.

Question 8

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

The answer of Assume that the forward rate is used...

Question 9

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 10

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 involves the use of current market conditions, such as spot exchange rates, to predict future exchange rate movements. Therefore, sole use of today's spot exchange rate of the euro would be best represented by market-based forecasting. Fundamental forecasting involves analyzing economic, political, and other fundamental factors that may affect exchange rates, while technical forecasting involves analyzing past exchange rate movements to identify trends and patterns. Mixed forecasting combines both market-based and fundamental or technical analysis.

Question 11

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

Accepted Answer

Sensitivity analysis involves changing multiple values of the influential factors to assess the impact on the forecast. This method helps in understanding how different values of an input can affect the outcome of a model or forecast.

Question 12

Which of the following is true?

Accepted Answer

The answer of Which of the following is true?
...

Question 13

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

This scenario describes a lagged input, where the value from the prior period is influencing the forecast for the future period. Instantaneous inputs would have an immediate effect on the forecast, and simultaneous inputs would mean that the values for multiple factors are being considered at the same time.

Question 14

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 15

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 is based on the analysis of economic, financial, and other qualitative and quantitative factors that may impact exchange rate movements. This includes analyzing the relationships between economic indicators (such as inflation, interest rates, and GDP) and exchange rate movements to forecast future exchange rates. Market-based forecasting, on the other hand, focuses on analyzing market trends and patterns to forecast exchange rates. Technical forecasting involves analyzing charts and past price movements to identify patterns and forecast future exchange rates. Mixed forecasting combines elements of fundamental, market-based, and technical analysis.

Question 16

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

The coefficient of the interest rate differential variable (F1F1F1S1F1F1F10.5) is negative, indicating an inverse relationship between the interest rate differential and the exchange rate. The coefficient of the inflation differential variable is positive, indicating a direct relationship between the inflation differential and the exchange rate. Therefore, the answer is B.

Question 17

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

Accepted Answer

If a currency is consistently declining over time, a market-based forecast will likely overestimate its future exchange rates. This is because market participants will adjust their expectations downwards, causing the currency to weaken further. As a result, a market-based forecast will likely be too optimistic and overestimate the future exchange rates of the currency.

Question 18

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

Interest rate parity implies that the forward exchange rate should offset the interest rate differential. The formula for the forward rate is: Forward Rate = Spot Rate * (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate). Plugging in the values: Forward Rate = 0.20 * (1 + 0.05)^5 / (1 + 0.08)^5 = 0.174.

Question 19

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 is an unbiased estimate of the future spot rate and interest rate parity holds, it supports the international Fisher effect (IFE), which suggests that differences in nominal interest rates reflect expected changes in exchange rates.

Question 20

Which of the following is true according to the text?

Accepted Answer

The text implies that none of the statements A, B, or C are true, as it suggests that recent forecasts have not been very accurate, the absolute forecast error as a percent of the realized value is not necessarily a good measure for detecting bias, and forecasting errors are typically larger, not smaller, for longer-term periods.

Quiz 9: Forecasting Exchange Rates