FIN 4213 INTERNATIONAL (EXAM 3)
QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTION
Huge Corp. has just initiated a market-based forecast system using the forward rate as an estimate of
the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed beloAccording to this
informationw are the forecasted and realized values for the last period:
According to this information and using the absolute forecast error as a percentage of the realized value,
the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar. - ANS -more accurate
than
Small Corp. would like to forecast the value of the Turkish lira 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 United States is 11 percent, while the Turkish five-year
interest rate is 15 percent. Based on this information, the Turkish lira should ____ by ____ percent over
the next five years. - ANS -depreciate; 16.22
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? - ANS
--3.1 percent
The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
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 ɑ0 = .005; ɑ1 = .4; and ɑ2 = .7. The most recent
quarterly percentage change in the inflation differential is -5 percent, while the most recent quarterly
percentage change in the income differential is 3 percent. Using this information, the forecast for the
percentage change in the ringgit is: - ANS --1.80 percent
,Which of the following is a method of forecasting exchange rate volatility? - ANS -deriving the exchange
rate's implied standard deviation from the currency option pricing model
Assume the following information:
Given this information, the mean absolute forecast error as a percentage of the realized value is about: -
ANS -6.5 percent
If it was determined that the movement of exchange rates was related to previous exchange rate values,
this implies that a ____ is valuable for forecasting exchange rate movements. - ANS -technical forecast
technique
Which of the following is not normally a reason for an MNC to forecast exchange rates? - ANS -to decide
whether to speculate in foreign exchange markets
Which of the following forecasting techniques would be most likely to use relationships between
interest rates and exchange rate movements to forecast the future exchange rate? - ANS -fundamental
forecasting
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 United States is expected to be 3 percent
during the next year, while inflation in Thailand is expected to be 10 percent. Under this scenario, Pro
Corp. would forecast the value of the baht at the end of the year to be: - ANS -$0.021
You are the manager of a large U.S.-based MNC. A member of the Chilean government, a good friend of
yours, has just contacted you to inform you that the Chilean central bank will raise interest rates next
week. If you cannot use this information to improve your forecast of the Chilean peso, then the foreign
exchange market for the Chilean peso is probably________ efficient. - ANS -semistrong form, strong
form, weak form. (all of these choices are correct)
From the corporate viewpoint, use of technical forecasting may be limited in that it - ANS -rarely
provides good point estimates, rarely provides a range of possible future values, focuses on the near
term. (all of these choices are correct)
, Which of the following is not a forecasting technique mentioned in your text? - ANS -accounting based
forecasting
Scenario analysis refers to the consideration of more than one possible outcome for a factor used in
fundamental forecasting. - ANS -false
Forecasting future exchange rates may be useful for hedging, investment, and financing decisions of an
MNC. - ANS -True
If a foreign currency is expected to ________ substantially against the parent's currency, the parent may
prefer to ________ the remittance of subsidiary earnings before the foreign currency weakens. - ANS -
weaken; expedite
Forecasting services often emphasize fundamental forecasting for short-term forecasts and technical
forecasting for long-term forecasts. - ANS -False
Although technical forecasting should not be very useful if foreign exchange markets are weak-form
efficient, technical forecasting appears to be widely used by speculators. - ANS -True
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. - ANS -True
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. - ANS -True
Which of the following is not true regarding fundamental forecasting? - ANS -Fundamental forecasting
has frequently outperformed other forecasting techniques, such as technical and market-based
forecasting, in past periods
Market-based forecasting is based on fundamental relationships between economic variables and
exchange rates. - ANS -False
QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTION
Huge Corp. has just initiated a market-based forecast system using the forward rate as an estimate of
the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed beloAccording to this
informationw are the forecasted and realized values for the last period:
According to this information and using the absolute forecast error as a percentage of the realized value,
the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar. - ANS -more accurate
than
Small Corp. would like to forecast the value of the Turkish lira 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 United States is 11 percent, while the Turkish five-year
interest rate is 15 percent. Based on this information, the Turkish lira should ____ by ____ percent over
the next five years. - ANS -depreciate; 16.22
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? - ANS
--3.1 percent
The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
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 ɑ0 = .005; ɑ1 = .4; and ɑ2 = .7. The most recent
quarterly percentage change in the inflation differential is -5 percent, while the most recent quarterly
percentage change in the income differential is 3 percent. Using this information, the forecast for the
percentage change in the ringgit is: - ANS --1.80 percent
,Which of the following is a method of forecasting exchange rate volatility? - ANS -deriving the exchange
rate's implied standard deviation from the currency option pricing model
Assume the following information:
Given this information, the mean absolute forecast error as a percentage of the realized value is about: -
ANS -6.5 percent
If it was determined that the movement of exchange rates was related to previous exchange rate values,
this implies that a ____ is valuable for forecasting exchange rate movements. - ANS -technical forecast
technique
Which of the following is not normally a reason for an MNC to forecast exchange rates? - ANS -to decide
whether to speculate in foreign exchange markets
Which of the following forecasting techniques would be most likely to use relationships between
interest rates and exchange rate movements to forecast the future exchange rate? - ANS -fundamental
forecasting
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 United States is expected to be 3 percent
during the next year, while inflation in Thailand is expected to be 10 percent. Under this scenario, Pro
Corp. would forecast the value of the baht at the end of the year to be: - ANS -$0.021
You are the manager of a large U.S.-based MNC. A member of the Chilean government, a good friend of
yours, has just contacted you to inform you that the Chilean central bank will raise interest rates next
week. If you cannot use this information to improve your forecast of the Chilean peso, then the foreign
exchange market for the Chilean peso is probably________ efficient. - ANS -semistrong form, strong
form, weak form. (all of these choices are correct)
From the corporate viewpoint, use of technical forecasting may be limited in that it - ANS -rarely
provides good point estimates, rarely provides a range of possible future values, focuses on the near
term. (all of these choices are correct)
, Which of the following is not a forecasting technique mentioned in your text? - ANS -accounting based
forecasting
Scenario analysis refers to the consideration of more than one possible outcome for a factor used in
fundamental forecasting. - ANS -false
Forecasting future exchange rates may be useful for hedging, investment, and financing decisions of an
MNC. - ANS -True
If a foreign currency is expected to ________ substantially against the parent's currency, the parent may
prefer to ________ the remittance of subsidiary earnings before the foreign currency weakens. - ANS -
weaken; expedite
Forecasting services often emphasize fundamental forecasting for short-term forecasts and technical
forecasting for long-term forecasts. - ANS -False
Although technical forecasting should not be very useful if foreign exchange markets are weak-form
efficient, technical forecasting appears to be widely used by speculators. - ANS -True
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. - ANS -True
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. - ANS -True
Which of the following is not true regarding fundamental forecasting? - ANS -Fundamental forecasting
has frequently outperformed other forecasting techniques, such as technical and market-based
forecasting, in past periods
Market-based forecasting is based on fundamental relationships between economic variables and
exchange rates. - ANS -False
