Selecting between Forecast Methods
Response to the following problem:
Bolivia currently has a nominal 1-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal 1-year risk-free interest rate is 8 percent. The spot rate of Bolivia's currency (called the boliviano) is $.14. The 1-year forward rate of the boliviano is $.108. What is the forecasted percentage change in the boliviano if the spot rate is used as a 1-year forecast? What is the forecasted percentage change in the boliviano if the 1-year forward rate is used as a 1-year forecast?
Which forecast do you think will be more accurate? Why?