EXHIBIT 8.

3 HOW THE FORECAST ERROR IS AFFECTED BY VOLATILITY

Exhibit 8.3 displays

Jeffthe results
Madura, fromHoque,
Ariful comparing the meanKrishnamurti,
absolute forecast error toFinancial
the volatility (standard deviation of exchange rate Cengage Australia
currency were derived using the currency’sChandrasekhar
prevailing spot rate as theInternational
forecast for one month Management,
ahead. The2nd Asia-Pacific
exhibit Edition. ©how
demonstrates 2021
movements) volatile
for selected
currencies,
currencies;
Ptygenerally
Ltd. All Rightswhichtheinclude
points
Maythe
are
notAustralian
plotted based
dollar
on(A$),
monthly
the Brazilian
data overreal,
theand
2007–12
athe New
period.
Zealand
The dollar
monthly(NZ$).
forecasts
in wholefororfor
forecast errors are lowerReserved.
for less volatile be scanned,
currencies, copied or the
including duplicated,
Chinese oryuan
posted to Singapore
and publicly accessible website,
dollar (S$), and higher in part.
more
each
 FORECAST ERROR
Forecast bias
 When a forecast error is measured as the forecasted value minus the realised value, negative errors indicate
underestimating, while positive errors indicate overestimating
 Statistical test of forecast bias: A conventional method of testing for a forecast bias is to apply the following
regression model to historical data.

there must
When a forecast
be someJeff bias
error Madura, Ariful
is measured
in the Hoque,
as the Chandrasekhar
forecasting forecasted A Krishnamurti,
procedure.value minus theInternational
conventional realised
method of Financial
value,
testing forManagement,
negative
a forecast 2ndisAsia-Pacific
errors indicate
bias to Edition.
underestimating,
apply the © 2021 Cengage Australia
following
whereas
positive errors
regression model Pty
indicateLtd. All
to historicalRights Reserved.
overestimating.
data. If the forecast errors for a particular currency are consistently positive or negative over time,orthen
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole in part.
 FORECAST ERROR
Forecast bias (cont.)
 Graphic Evaluation of Forecast Bias
 Forecast bias can be examined with the use of a graph that compares forecasted values with
the realised values for various time periods. (Exhibits 8.4 and 8.5)
 Shifts in Forecast Bias over Time
 Because the forecast bias can change over time, adjusting forecasts to reflect past bias is not a
reliable technique.

would have
Forecast bias
been
canJeff
similar
beMadura,
examined
because with
Ariful the the
one-month
Hoque, use of a graph
forward that
ratecompares
was usually forecasted
close toFinancial
values
the prevailing
with the spot
realised
rate values
inAsia-Pacific
the periods
for various
considered
time periods.
and
later. During depreciated;
consistently the period from
hence,
January
the 2006Chandrasekhar
one-month
to October
forecast Krishnamurti,
2008,
typically
the euro International
overestimated
exhibited fairly
the spot Management,
consistent
rate one month2nd
appreciation.ahead.
Thus, theifEdition.
Even © 2021
one-month
the one-month Cengage Australia
forecast
Thewould
so forecast
yieldbias
a similar
of aLtd.
Pty currency
forecast
All tends
RightstoReserved.
thetoprevailing
shift
Mayoverspot
nottime.
be bias
rate.
Consider
isBecause
scanned, notcopied
athe
reliable
the
use
or forecast
oftechnique.
the spot
duplicated,bias
or rate
canofchange
posted the
to a euroover
to forecast
publicly time, adjusting
the
accessible euro’s
forecasts
website, value
in to
one
whole reflect
typically rate
forward underestimated
of the euro (rather
the spotthanrateitsone
prevailing
month ahead.
spot rate)
During
had been
the period
used from
to predict
Decemberthe spot
2009ratetoone
Junemonth
2010,ahead,
however,
the the euro bias part.
forecast or in
month
past
 EXHIBIT 8.4 EVALUATION OF FORECAST PERFORMANCE

Jeff Madura,
For eight consecutive quarters,Ariful Hoque,
Tunek Co.Chandrasekhar Krishnamurti,
used the three-month International
forward Financial Q
rate of Currency Management, 2ndvalue
to forecast its Asia-Pacific Edition. ©
three months 2021 Cengage
ahead. The Australia
Pty Ltd. All Rights Reserved. May not be graphically
scanned, copiedinorExhibit 8.5. or posted to a publicly accessible website, in whole or in part.
duplicated,
results from this strategy are shown in Exhibit 8.4, and the predicted and realised exchange rate values in Exhibit 8.4 are compared