Chapter : Review Questions
4. Measuring Forecast Accuracy. You are hired as a consultant to assess a firm's ability to forecast. The firm has developed a point forecast for two different currencies presented in the following table. The firm asks you to determine which currency was forecasted with greater accuracy.
Yen Actual Pound Actual
Period Forecast Yen Value Forecast Pound Value
1 $.0050 $.0051 $1.50 $1.51
2 .0048 .0052 1.53 1.50
3 .0053 .0052 1.55 1.58
4 .0055 .0056 1.49 1.52
6. Forecast Error. The director of currency forecasting at Champaign-Urbana Corp. says, "The most critical task of forecasting exchange rates is not to derive a point estimate of a future exchange rate but to assess how wrong our estimate might be." What does this statement mean?
7. Forecasting Latin American Currencies. The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generally declined substantially against the dollar over time.
Most of these countries have high inflation rates and high interest rates. The data on inflation rates, economic growth, and other economic indicators are subject to error, as limited resources are used to compile the data.
a. If the forward rate is used as a market-based forecast, will this rate result in a forecast of appreciation, depreciation, or no change in any particular Latin American currency? Explain.
b. If technical forecasting is used, will this result in a forecast of appreciation, depreciation, or no change in the value of a specific Latin American currency? Explain.
c. Do you think that U.S. firms can accurately forecast the future values of Latin American currencies? Explain.