Exam 9: Forecasting Exchange Rates

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

Two methods to assess exchange rate volatility are the volatility of historical exchange rate movements and the exchange rate's implied standard deviation from the currency option pricing model.

The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):

Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future,which is not very helpful for developing corporate policies.

If the one-year forward rate for the euro is $1.07,while the current spot rate is $1.05,the expected percentage change in the euro is ______%.

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.

Inflation and interest rate differentials between the U.S.and foreign countries are examples of variables that could be used in fundamental forecasting.

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: $S_{t}=a_{0}+a_{1} F_{t-1}+µ t$ Where is the spot rate of the pound in year t and is the forward rate of the pound in year t-1.Regression results reveal coefficients of 0 and 1.3.Thus,Gamma has reason to believe that its past forecasts have ______________ the realized spot rate. 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 $a_{0}=0$ and $a_{1}=1.3$ . Thus, Gamma has reason to believe that its past forecasts have the realized spot rate.

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

If the forward rate is used as an indicator of the future spot rate,the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount,respectively.

If points are scattered evenly on both sides of the perfect forecast line,then the forecast appears to be very accurate.

If a foreign currency is expected to ____________ substantially against the parent's currency,the parent may prefer to ____________ the remittance of subsidiary earnings.

A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.

If the pattern of currency values over time appears random,then technical forecasting is appropriate.

Assume the following information: Predicted Value of Realized Value of Period New Zealand Dollar New Zealand Dollar 1 $.52 $.50 2 .54 .60 3 .44 .40 4 .51 .50 Given this information,the mean absolute forecast error as a percentage of the realized value is about:

Factors such as economic growth,inflation,and interest rates are an integral part of __________ forecasting.

Which of the following is not a method of forecasting exchange rate volatility

Market-based forecasting involves the use of historical exchange rate data to predict future values.