FINAL Flashcards
If you believe in the foreign exchange market is weak-form efficient, then you believe you can look at past trends and patterns to accurately predict exchange rate movements (T/F)
False
Using the PPP model, if the US inflation is expected to be 5% and the Brazilian inflation is expected to be 13%, what will the estimated USD/BRL spot rate approximately be in 1-year if today it is 5.58 BRL?
6.03
When conducting valuation analysis that requires currency conversion, it is always best to use a point estimate as opposed to a range of forecasted exchange rate values (T/F)
False
Which type of analysis relies on recognizing patterns and trends in forex data to predict exchange rates?
a. Market-Based analysis
b. Fundamental analysis
c. Technical analysis
Technical Analysis
Brazil is expected to have higher inflation rates than the US over the next five years. Based on relative economic strength, which currency would you expect to appreciate?
a. USD
b. BRL
USD
You conduct a regression analysis where the actual spot is the dependent variable and the predicted spot rate is the independent variable. Your resulting Beta coefficient is 1.5, which is statistically significant. According to your model, it would appear that your prediction method ________ predicts the exchange rate.
a. Overestimates
b. Accurately
c. Underestimates
Underestimates
〖% Δ Spot Rate〗t =0.05+ 0.5〖Inflation Diff_t- 0.4〖Income Growth Diff_t - 0.50〖GDP Growth Diff〗t
According to the regression values above, for each 1% change in ______ the spot rate is expected to appreciate by .50%
a. income
b. GDP
c. inflation
Inflation
The 5-year forward premium is 2.50% for the USD/BRL. The USD/BRL current spot rate is 5.58 BRL.
Using market-based analysis, what is the closest estimate for the USD/BRL spot rate in 5-years?
5.72
Using instantaneous factors in regression analysis will always increase the accuracy of forecasts compared to using lagged factors (T/F)
False
When conducting valuation analysis on MNC’s, all the firm’s cash flows need to be converted into the domestic currency of the company. (T/F)
True
You conduct the following regression analysis:
% Δ Spot Ratet = α+ β_1 〖Inflation Diff〗_t+ Income Difft-1 + GPD Growth Diff t + ε
All intendent variables are instantaneous. (T/F)
False
Inflation would be an example of the type of indicator used in market-based analysis. (T/F)
False
A firm expecting future receivables in foreign currency most closely classified into which financial management category?
a. short-term hedging and cash management
b. evaluating borrowing and investment opportunities
c. operating strategy
d. long-term strategic decisions
short-term hedging and cash management
If you believe that exchange rates price in all publicly known and relevant information but do not price in all private information. You believe the market is at most _______
a. strong
b. semi-strong
c. weak
semi-strong
Your predicted value for the USD/BRL was 6.04 however the actual value was 7.21. What was your absolute forecast error in percentage form?
16.23%
Predicting exchange rates allows firms to maximize returns and maximize exchange rate risk. (T/F)
False
You estimated the 1-year USD/CAD rate would be 1.15 but the actual rate was 1.17. The raw forecast error is _______, the absolute forecast error is ______, and the absolute forecast error in percentage form is ______.
-0.02; 0.02; 1.71%
A firm deciding where in the world to sell its final product most closely classifies into which financial management category?
a. Evaluating borrowing and investment opportunity
b. Operating strategy
c. Short term hedging and cash management
d. Long term strategic decisions
Operating strategy
The EUR/CHF spot rate is currently 1.07 CHF. The 1 year interest rate in the EU is 2.5% while the 1 year interest rate in Switzerland is 1.25%. Based on this information, using the PPP model, what is the estimated EUR/CHF rate in 1 year?
1.06
You estimated the following regression model for the USD/CAD: [% change in spot rate] = 0.5 - 0.2[inflation Diff] + 0.45 [Income Growth Diff]. Assume that the inflation differential is -3% and the income growth differential is 4%. What is the expected percentage change in the USD/CAD?
2.9%
Exchange rates influence MNC valuation in one way, via the conversion of cash flows into domestic currency(CF). (T/F)
False
When evaluating which forecasting model to use, MNCs should always pick the most accurate model if they want to make the most profit (T/F)
False
In a strong-form market, security prices reflect all public and private information (T/F)
True
A regression model was applied to explain movements in the Canadian dollar’s value over time. The coefficient for the inflation differential between the United States and Canada was -0.2. The coefficient of the interest rate differential between the United States and Canada produced a coefficient of 0.8. Thus, the Canadian dollar depreciates when the inflation differential ___ and the interest rate differential ____
increases; decreases