Chapter 9
Forecasting Exchange Rates
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1. Which of the following is not a corporate function that makes exchange rate forecasting necessary?
a. hedging decisions
b. capital budgeting decisions
c. earnings assessments
d. short-term investment decisions
e. all of the above are corporate functions that make exchange rate forecasting necessary

2. Which of the following is not a method of forecasting exchange rates?
a. institutional
b. fundamental
c. technical
d. market-based
e. all of the above are general groups for forecasting exchange rates

3. Which of the following is a limitation in fundamental forecasting?
a. uncertain timing of impact
b. the forecasts are always inaccurate
c. omission of other relevant factors from the model
d. both a and c
e. all of the above

4. Market-based forecasting is based on what?
a. spot rates
b. forward rates
c. either a or b
d. neither a nor b

5. ___________ forecasting involves use of historical exchange rate data to predict future values.
a. fundamental
b. technical
c. market-based
d. none of the above

6. Using the mixed forecasting method to predict the value of the Japanese yen, which of the following factors should be considered?
a. recent movements in the yen
b. Japanese inflation
c. the current spot rate of the yen
d. all of the above
e. none of the above

7. If a forecaster predicts the British pound to be $1.70 in one year, but the spot rate of the pound turns out to be $1.80 in one year, what is the absolute forecast error as a percentage of realized value?
a. 5.56%
b. -5.56%
c. -5.88%
d. 5.88%
e. none of the above

8. MNC A uses a regression model to forecast the value of the euro in the upcoming period. The following regression model was developed: €t = b0 + b1INFt-1 + b2INCt-1, where the two variables are the percentage change in the inflation differential between the U.S. and Europe and the quarterly percentage change in the income growth differential between the U.S. and Europe, respectively. The coefficients for the regression model are: b0 = 0.005, b1 = 0.9, and b2 = 0.7. In the most recent quarterly, U.S. inflation increased by 1%, while European inflation increased by 2%. Also in the most recent quarter, U.S. income growth increased by 1.5%, while European income growth increased by 2%. Based on this information, what is the expected change in the euro?
a. 0.75% appreciation
b. 0.75% depreciation
c. 1.05% appreciation
d. 0.05% depreciation
e. none of the above

9. From a corporate point of view, use of technical forecasting may be limited in that it typically focuses on the near future.
a. True
b. False

10. Regression analysis, sensitivity analysis, and purchasing power parity (PPP) can be used for fundamental forecasting of exchange rates.
a. True
b. False

11. The forward rate is considered biased in market-based forecasting because of implications of interest rate parity.
a. True
b. False

12. Some studies have shown forecast services to be not much more accurate than freely available forecasts.
a. True
b. False

13. On a graph with X as the predicted value, Y as the realized value, and a 45 degree line drawn from the apex, upward bias would be shown if more points are below the line than above the line.
a. True
b. False

14. If currency markets are weak-form efficient, then fundamental forecasting cannot be used to improve forecasts.
a. True
b. False

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