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 + a₁F_t _- ₁ + $\mu$ _t,
Where S_t is the spot rate of the pound in year t and F_t _- 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

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 + a₁F_t _- ₁ +

\mu

_t,
Where S_t is the spot rate of the pound in year t and F_t _- 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.

Quizplus · Accepted Answer

The coefficient a₁ = 1.3 indicates that the forward rate forecasts have consistently underestimated the realized spot rate, as the coefficient is greater than 1.

Gamma Corporation Has Incurred Large Losses Over the Last Ten μ\muμ

Gamma Corporation Has Incurred Large Losses Over the Last Ten $\mu$