45. The most sophisticated forecasting techniques provide consistently accurate forecasts.
a. True
b. False
46. 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.
a. True
b. False
47. Research indicates that currency forecasting services almost always outperform forecasts based on the
forward rate.
a. True
b. False
48. When measuring forecast performance of different currencies, it is often useful to adjust for their
relative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast
errors.
a. True
b. False
49. The closer graphical points are to the perfect forecast line, the better is the forecast.
a. True
b. False
50. Foreign exchange markets appear to be strong-form efficient.
a. True
b. False
51. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
a. True
b. False
52. 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.
a. True
b. False
53. Market-based forecasting involves the use of historical exchange rate data to predict future values.
a. True
b. False
54. Fundamental models examine moving averages over time and thus allow the development of a
forecasting rule.
a. True
b. False
55. A forecasting technique based on fundamental relationships between economic variables and exchange
rates, such as inflation, is referred to as technical forecasting.
a. True
b. False
56. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is used
for longer-term forecasts.
a. True
b. False
57. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to be
very accurate.
a. True
b. False
58. If foreign exchange markets are strong-form efficient, then all relevant public and private information
is already reflected in today‘s exchange rates.
a. True
b. False
59. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major
currencies, but not for currencies of smaller countries.
a. True
b. False
60. The potential forecast error is larger for currencies that are more volatile.
a. True
b. False
61. A forecast of a currency one year in advance is typically more accurate than a forecast one week in
advance since the currency reverts to equilibrium over a longer term period.
a. True
b. False
62. In general, any key managerial decision that is based on forecasted exchange rates should rely
completely on one forecast rather than alternative exchange rate scenarios.
a. True
b. False
63. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted value
of the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ the
payments.
a.
higher; to hedge
b.
lower; not to hedge
c.
higher; not to hedge
d.
none of the above
64. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, it
will always accept that project if the foreign currency is expected to appreciate.
a. True
b. False
65. The following is not a limitation of technical forecasting:
a.
It’s not suitable for long-term forecasts of exchange rates.
b.
It doesn’t provide point estimates or a range of possible future values.
c.
It cannot be applied to currencies that exhibit random movements.
d.
It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.
66. The following regression model was estimated to forecast the percentage change in the Australian
Dollar (AUD):
AUDt = a0 + a1INTt + a2INFt − 1 +
t,
where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in
period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and
Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = −.8; and
a2 = .5. Assume that INFt − 1 = 4%. However, the interest rate differential is not known at the beginning
of period t and must be estimated. You have developed the following probability distribution:
Probability
Possible Outcome
20%
−3%
80%
−4%
There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it
will change by ____.
a.
4.5%; 6.1%;
b.
6.1%; 4.5%
c.
4.5%; 5.3%
d.
None of the above
67. Purchasing power parity is used in:
a.
technical forecasting.
b.
fundamental forecasting.
c.
market-based accounting.
d.
all of the above.
68. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the
yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.
a.
higher; buy; upward
b.
higher; sell; downward
c.
higher; sell; upward
d.
lower; buy; upward
69. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward
rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the
Canadian dollar forward rate.
a.
lower; sell; upward
b.
lower; sell; downward
c.
higher; sell; upward
d.
higher; sell; downward
70. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing
power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
a.
appreciation of yen’s value over the next year.
b.
depreciation of yen’s value over the next year.
c.
no change in yen’s value over the next year.
d.
information about interest rates is needed to answer this question.
71. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fisher
effect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:
a.
appreciation of pound’s value over the next year.
b.
depreciation of pound’s value over the next year.
c.
no change in pound’s value over the next year.
d.
not enough information to answer this question.
72. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecasting
exchange rate movements.
a.
weak-form
b.
semistrong-form
c.
strong form
d.
all of the above
73. If today’s exchange rate reflects any historical trends in Canadian dollar exchange rate movements, but
not all relevant public information, then the Canadian dollar market is:
a.
weak-form efficient.
b.
semistrong-form efficient.
c.
strong-form efficient.
d.
all of the above.
74. Leila Corporation used the following regression model to determine if the forecasts over the last ten
years were biased:
St = a0 + a1Ft − 1 +
t,
where St is the spot rate of the yen in year t and Ft − 1 is the forward rate of the yen in year t − 1.
Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to
believe that its past forecasts have ____ the realized spot rate.
a.
overestimated
b.
underestimated
c.
correctly estimated
d.
none of the above
75. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume
that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is
$.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year
forward rate is used as a forecast?
a.
$.840
b.
$.890
c.
$.856
d.
$.854
76. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?
a.
to decide in which foreign market to invest the excess cash.
b.
to decide where to borrow at the lowest cost.
c.
to determine whether to require the subsidiary to remit the funds or invest them locally.
d.
to speculate on the exchange rate movements.
77. Sensitivity analysis allows for all of the following except:
a.
accountability for uncertainty.
b.
focus on a single point estimate of future exchange rates.
c.
development of a range of possible future values.
d.
consideration of alternative scenarios.
78. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.
a. True
b. False
79. A regression model was applied to explain movements in the Canadian dollar’s value over time. The
coefficient for the inflation differential between the U.S. and Canada was −0.2. The coefficient of the
interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, the
Canadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.
a.
increases; increases
b.
decreases; increases
c.
increases; decreases
d.
increases; decreases
80. If the pattern of currency values over time appears random, then technical forecasting is appropriate.
a. True
b. False
81. Market-based forecasting is based on fundamental relationships between economic variables and
exchange rates.
a. True
b. False
82. In market-based forecasting, a forward rate quoted for a specific date in the future can be used as the
forecasted spot rate on that future date.
a. True
b. False
83. Since the forward rate does not capture the nominal interest rate between two countries, it should
provide a less accurate forecast for currencies in high-inflation countries than the spot rate.
a. True
b. False
84. Inflation and interest rate differentials between the U.S. and foreign countries are examples of
variables that could be used in fundamental forecasting.
a. True
b. False
85. If a foreign country’s interest rate is similar to the U.S. rate, the forward rate premium or discount will
be close to zero, meaning that the forward rate and spot rate will provide similar forecasts.
a. True
b. False
86. Using the inflation differential between two countries to forecast their exchange rates is not always
accurate because of such factors as the uncertain timing of the impact of inflation and barriers to trade.
a. True
b. False
87. Forecast errors tend to be large for short forecast horizons.
a. True
b. False
88. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
MYRt = a0 + a1INCt − 1 + a2INFt − 1 +
t,
where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in
the inflation differential, and INC is the previous quarterly percentage change in the income growth
differential. Regression results indicate coefficients of a0 = 0.005; a1 = 0.4; and a2 = 0.7. The most
recent quarterly percentage change in the inflation differential is −5%, while the most recent quarterly
percentage change in the income differential is 3%. Using this information, the forecast for the
percentage change in the ringgit is
a.
4.60%.
b.
−1.80%.
c.
5.2%.
d.
−4.60%.
e.
None of the above
89. Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht
(THB), which has a current exchange rate of $0.022. Inflation in the U.S. is expected to be 3% during
the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would
forecast the value of the baht at the end of the year to be:
a.
$0.023.
b.
$0.021.
c.
$0.020.
d.
None of the above
90. Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now
using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts.
However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year
interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next
five years.
a.
appreciate; 16.22
b.
depreciate; 16.22
c.
appreciate; 6.66
d.
depreciate; 6.66
e.
none of the above
91. The one-year forward rate of the British pound is $1.55, while the current spot rate is $1.60. Based on
the forward rate, what is the expected percentage change in the British pound over the next year?
a.
+5.0%
b.
−3.1%
c.
+3.1%
d.
+3.2%
e.
None of the above
92. Which of the following is not a method of forecasting exchange rate volatility?
a.
Using the absolute forecast error as a percentage of the realized value to improve your
forecast.
b.
Using the volatility of historical exchange rate movements as a forecast for the future.
c.
Using a time series of volatility patterns in previous periods.
d.
Deriving the exchange rate’s implied standard deviation from the currency option pricing
model.