IBUS 401 - FINAL EXAM CORRECT 100%
Assume that interest rate parity holds. The U.S. five - year interest rate is 5 percent
annualized, and the Mexican five - year interest rate is 8 percent annualized. Today's
spot rate of the Mexican peso is $0.20. What is the approximate five-year forecast of the
peso's spot rate if the five-year forward rate is used as a forecast? - ANSWER
(1.05)^5/(1.08)^5 = -13%
$.20(1+(-13%))=$.174
Assume that the forward rate is used to forecast the spot rate. The forward rate of the
Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar
is $.80. The spot rate forecasted for one year ahead is: - ANSWER $.80(1+(-
6%))=$.752
Which of the following forecasting techniques would be most likely to use today's
forward exchange rate to forecast the future exchange rate? - ANSWER market-based
forecasting
Which of the following forecasting techniques would be most likely to use relationships
between economic factors and exchange rate movements to forecast the future
exchange rate? - ANSWER fundamental forecasting
Which of the following forecasting techniques would be most likely to use the historical
exchange rate data for the euro to predict the euro's future exchange rate? - ANSWER
technical forecasting
Factors such as economic growth, inflation, and interest rates are an integral part of
____ forecasting. - ANSWER fundamental
If an MNC invests excess cash in a foreign county, it would like the foreign currency to
____; if an MNC issues bonds denominated in a foreign currency, it would like the
foreign currency to ____. - ANSWER appreciate; depreciate
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 ____ percent. - ANSWER 1.07/1.05 - 1 =
1.90%
Purchasing power parity is used in: - ANSWER fundamental forecasting
Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73.
The realized value of the Canadian dollar in the most recent period was $0.80. Thus,
the absolute forecast error as a percentage of the realized value was ____ percent. -
ANSWER |(.73-.80)|/(.80)=8.8% (Take absolute value of the numerator here)
, Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined
the following equation for the euro:
eurot
= b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1
The most recent quarterly percentage change in the inflation differential between the
United States and Europe was 2 percent, while the most recent quarterly percentage
change in the income growth differential between the United States and Europe was −1
percent. Based on this information, the forecast for the euro is a(n) ____ of ____
percent. - ANSWER eurot = .005 + .9(.02) + 1.1(−.01) = 1.2%
appreciate; 1.2
The following regression model was estimated to forecast the percentage change in the
Australian dollar (AUD):
AUDt = a0 + a1INTt + a2INFt − 1 + μt,
where AUD is the quarterly change in the Australian dollar, INT is the real interest rate
differential in period t between the United States and Australia, and INF is the inflation
rate differential between the United States 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 percent probability that the Australian dollar will change by ____, and an
80 percent probability it will change by ____. - ANSWER Probability 20% = .001 + (−.8)
(−.03) + (.5)(.04) = 4.5%
Probability 80% = .001 + (−.8)(−.04) + (.5)(.04) = 5.3%
Which of the following is NOT a forecasting technique mentioned in your text? -
ANSWER accounting-based forecasting
Which of the following is NOT one of the major reasons for MNCs to forecast exchange
rates? - ANSWER to speculate on exchange rate movements
Assume that interest rate parity holds. The U.S. five - year interest rate is 5 percent
annualized, and the Mexican five - year interest rate is 8 percent annualized. Today's
spot rate of the Mexican peso is $0.20. What is the approximate five-year forecast of the
peso's spot rate if the five-year forward rate is used as a forecast? - ANSWER
(1.05)^5/(1.08)^5 = -13%
$.20(1+(-13%))=$.174
Assume that the forward rate is used to forecast the spot rate. The forward rate of the
Canadian dollar contains a 6 percent discount. Today's spot rate of the Canadian dollar
is $.80. The spot rate forecasted for one year ahead is: - ANSWER $.80(1+(-
6%))=$.752
Which of the following forecasting techniques would be most likely to use today's
forward exchange rate to forecast the future exchange rate? - ANSWER market-based
forecasting
Which of the following forecasting techniques would be most likely to use relationships
between economic factors and exchange rate movements to forecast the future
exchange rate? - ANSWER fundamental forecasting
Which of the following forecasting techniques would be most likely to use the historical
exchange rate data for the euro to predict the euro's future exchange rate? - ANSWER
technical forecasting
Factors such as economic growth, inflation, and interest rates are an integral part of
____ forecasting. - ANSWER fundamental
If an MNC invests excess cash in a foreign county, it would like the foreign currency to
____; if an MNC issues bonds denominated in a foreign currency, it would like the
foreign currency to ____. - ANSWER appreciate; depreciate
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 ____ percent. - ANSWER 1.07/1.05 - 1 =
1.90%
Purchasing power parity is used in: - ANSWER fundamental forecasting
Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73.
The realized value of the Canadian dollar in the most recent period was $0.80. Thus,
the absolute forecast error as a percentage of the realized value was ____ percent. -
ANSWER |(.73-.80)|/(.80)=8.8% (Take absolute value of the numerator here)
, Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined
the following equation for the euro:
eurot
= b0 + b1INFt − 1 + b2INCt − 1
= .005 + .9INFt − 1 + 1.1INCt − 1
The most recent quarterly percentage change in the inflation differential between the
United States and Europe was 2 percent, while the most recent quarterly percentage
change in the income growth differential between the United States and Europe was −1
percent. Based on this information, the forecast for the euro is a(n) ____ of ____
percent. - ANSWER eurot = .005 + .9(.02) + 1.1(−.01) = 1.2%
appreciate; 1.2
The following regression model was estimated to forecast the percentage change in the
Australian dollar (AUD):
AUDt = a0 + a1INTt + a2INFt − 1 + μt,
where AUD is the quarterly change in the Australian dollar, INT is the real interest rate
differential in period t between the United States and Australia, and INF is the inflation
rate differential between the United States 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 percent probability that the Australian dollar will change by ____, and an
80 percent probability it will change by ____. - ANSWER Probability 20% = .001 + (−.8)
(−.03) + (.5)(.04) = 4.5%
Probability 80% = .001 + (−.8)(−.04) + (.5)(.04) = 5.3%
Which of the following is NOT a forecasting technique mentioned in your text? -
ANSWER accounting-based forecasting
Which of the following is NOT one of the major reasons for MNCs to forecast exchange
rates? - ANSWER to speculate on exchange rate movements
