FIN 4213 EXAM 3 UPDATED ACTUAL QUESTIONS AND
CORRECT ANSWERS
Question:
1. 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.
Answer:
more accurate than
Question:
2. 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.
Answer:
depreciate; 16.22
Question:
3. 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?
Answer:
-3.1 percent
Question:
4. 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 ■0 = .005; ■1 = .4; and ■2 = .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:
Answer:
-1.80 percent
Question:
5. Which of the following is a method of forecasting exchange rate volatility?
Answer:
deriving the exchange rate's implied standard deviation from the currency option pricing model
Question:
6. Assume the following information:
Given this information, the mean absolute forecast error as a percentage of the realized value is about:
,Answer:
6.5 percent
Question:
7. 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.
Answer:
technical forecast technique
Question:
8. Which of the following is not normally a reason for an MNC to forecast exchange rates?
Answer:
to decide whether to speculate in foreign exchange markets
Question:
9. 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?
Answer:
fundamental forecasting
Question:
10. 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:
Answer:
$0.021
Question:
11. 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.
Answer:
semistrong form, strong form, weak form. (all of these choices are correct)
Question:
12. From the corporate viewpoint, use of technical forecasting may be limited in that it
Answer:
rarely provides good point estimates, rarely provides a range of possible future values, focuses on the near
term. (all of these choices are correct)
Question:
13. Which of the following is not a forecasting technique mentioned in your text?
Answer:
accounting based forecasting
, Question:
14. Scenario analysis refers to the consideration of more than one possible outcome for a factor used in
fundamental forecasting.
Answer:
false
Question:
15. Forecasting future exchange rates may be useful for hedging, investment, and financing decisions of an
MNC.
Answer:
True
Question:
16. 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.
Answer:
weaken; expedite
Question:
17. Forecasting services often emphasize fundamental forecasting for short-term forecasts and technical
forecasting for long-term forecasts.
Answer:
False
Question:
18. 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.
Answer:
True
Question:
19. 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.
Answer:
True
Question:
20. 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.
Answer:
True
Question:
21. Which of the following is not true regarding fundamental forecasting?
Answer:
Fundamental forecasting has frequently outperformed other forecasting techniques, such as technical and
market-based forecasting, in past periods
CORRECT ANSWERS
Question:
1. 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.
Answer:
more accurate than
Question:
2. 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.
Answer:
depreciate; 16.22
Question:
3. 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?
Answer:
-3.1 percent
Question:
4. 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 ■0 = .005; ■1 = .4; and ■2 = .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:
Answer:
-1.80 percent
Question:
5. Which of the following is a method of forecasting exchange rate volatility?
Answer:
deriving the exchange rate's implied standard deviation from the currency option pricing model
Question:
6. Assume the following information:
Given this information, the mean absolute forecast error as a percentage of the realized value is about:
,Answer:
6.5 percent
Question:
7. 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.
Answer:
technical forecast technique
Question:
8. Which of the following is not normally a reason for an MNC to forecast exchange rates?
Answer:
to decide whether to speculate in foreign exchange markets
Question:
9. 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?
Answer:
fundamental forecasting
Question:
10. 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:
Answer:
$0.021
Question:
11. 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.
Answer:
semistrong form, strong form, weak form. (all of these choices are correct)
Question:
12. From the corporate viewpoint, use of technical forecasting may be limited in that it
Answer:
rarely provides good point estimates, rarely provides a range of possible future values, focuses on the near
term. (all of these choices are correct)
Question:
13. Which of the following is not a forecasting technique mentioned in your text?
Answer:
accounting based forecasting
, Question:
14. Scenario analysis refers to the consideration of more than one possible outcome for a factor used in
fundamental forecasting.
Answer:
false
Question:
15. Forecasting future exchange rates may be useful for hedging, investment, and financing decisions of an
MNC.
Answer:
True
Question:
16. 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.
Answer:
weaken; expedite
Question:
17. Forecasting services often emphasize fundamental forecasting for short-term forecasts and technical
forecasting for long-term forecasts.
Answer:
False
Question:
18. 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.
Answer:
True
Question:
19. 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.
Answer:
True
Question:
20. 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.
Answer:
True
Question:
21. Which of the following is not true regarding fundamental forecasting?
Answer:
Fundamental forecasting has frequently outperformed other forecasting techniques, such as technical and
market-based forecasting, in past periods
