Name :

1. Assume the following information:

Predicted Value of
Realized Value of
Period
New Zealand Dollar
New Zealand Dollar
1
$.52
$.50
2
.54
.60
3
.44
.40
4
.51
.50
Given this information, the mean absolute forecast error as a percentage of the realized value is about:
SOLUTION: [|$.52 $.50|/$.50 + |$.54 $.60|/$.60 + |$.44 $.40|/$.40 + |$.51 $.50|/
$.50)]/4
= [.04 + .10 + .10 + .02]/4
= .065 = 6.50%
2. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the
Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.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?
SOLUTION: (1.05)5/(1.08)5 1 = 13%; $.20[1 + (13%)] = $.174
3. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar
contains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for
one year ahead is:
SOLUTION: $.80 [1 + (6%)] = $.752
4. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):
MYRt = a0 + a1INCt 1 + a2INFt 1 + t,
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 a0 = .005; a1 = .4; and a2 = .7. The most recent
quarterly percentage change in the inflation differential is 5%, while the most recent quarterly
percentage change in the income differential is 3%. Using this information, the forecast for the
percentage change in the ringgit is:
SOLUTION: MYRt = .005 + (.4)(.03) + (.7)(.05) = 1.80%
5. The following regression model was estimated to forecast the value of the Indian rupee (INR):
INRt = a0 + a1INTt + a2INFt 1 + t,
where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t
between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the
previous period. Regression results indicate coefficients of a0 = .003; a1 = .5; and a2 = .8. Assume that
INFt 1 = 2%. 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
30%
40%
30%

Possible Outcome
2%
3%
4%

The expected change in the Indian rupee in period t is:

SOLUTION: E[INTt] = (.02)(.3) + (.03)(.4) + (.04)(.3) = 3.00%
INRt = .003 + (.5)(.03) + (.8)(.02) = 3.40%