Deck 8: Exchange Rate Forecasting, Technical Analysis and Trading Rules

Question 1

Which of the following operations does NOT require exchange rate forecasting?

A) spot-forward speculation
B) uncovered interest arbitrage
C) covered interest arbitrage
D) hedging foreign exchange exposure

Answer 1

covered interest arbitrage

Question 2

Central bank intervention requires exchange rate forecasting for:

A) making a speculative profit
B) calculating the future value of foreign reserves
C) curbing speculative activity against the domestic currency
D) attempting to make the expected path of the exchange rate converge on the desired path

Answer 2

attempting to make the expected path of the exchange rate converge on the desired path

Question 3

A spot speculator:

A) sells a currency if a forecast indicates that it will appreciate
B) buys a currency if a forecast indicates that it will appreciate
C) short sells a currency if a forecast indicates that it will appreciate
D) buys a currency if a forecast indicates that it will depreciate

Answer 3

buys a currency if a forecast indicates that it will appreciate

Question 4

A spot speculator:

A) sells a currency if a forecast indicates that it will depreciate
B) buys a currency if a forecast indicates that it will depreciate
C) short sells a currency if a forecast indicates that it will depreciate
D) either sells or short sells a currency if a forecast indicates that it will depreciate

Question 5

If a forecast indicates that the spot exchange rate will be higher than the forward rate on the maturity date of the forward contract:

A) a speculator will buy forward and sell spot upon delivery
B) a speculator will sell forward and sell spot upon delivery
C) a speculator will buy forward and buy spot upon delivery
D) a speculator will sell forward and buy spot upon delivery

Question 6

If a forecast indicates that the spot exchange rate will be lower than the forward rate on the maturity date of the forward contract:

A) a speculator will buy forward and sell spot upon delivery
B) a speculator will sell forward and sell spot upon delivery
C) a speculator will buy forward and buy spot upon delivery
D) a speculator will sell forward and buy spot upon delivery

Question 7

If the underlying currency is expected to appreciate:

A) a speculator will go long a call option or long a put option
B) a speculator will go long a call option or short a put option
C) a speculator will go short a call option or long a put option
D) a speculator will go short a call option or short a put option

Question 8

If the underlying currency is expected to depreciate:

A) a speculator will go long a call option or long a put option
B) a speculator will go long a call option or short a put option
C) a speculator will go short a call option or long a put option
D) a speculator will go short a call option or short a put option

Question 9

If the foreign currency is expected to appreciate to a value in excess of the appropriate forward rate:

A) a hedger will hedge foreign payables by buying the foreign currency forward
B) a hedger will hedge foreign payables by selling the foreign currency forward
C) a hedger will not hedge foreign payables
D) a hedger will regret his decision to hedge foreign payables if the foreign currency is higher than the forward rate at maturity

Question 10

If the foreign currency is expected to appreciate to a value lower than the appropriate forward rate:

A) a hedger will hedge foreign receivables by buying the foreign currency forward
B) a hedger will hedge foreign receivables by selling the foreign currency forward
C) a hedger will not hedge foreign receivables
D) a hedger will regret his decision to hedge foreign receivables if the foreign currency is lower than the forward rate at maturity

Question 11

If the foreign currency is expected to appreciate to a value higher than the appropriate forward rate:

A) a hedger will hedge foreign payables by buying a put option
B) a hedger will hedge foreign payables by selling the foreign currency forward
C) a hedger will not hedge foreign payables
D) a hedger will regret his decision to hedge foreign payables if the foreign currency is lower than the forward rate at maturity

Question 12

If the foreign currency is expected to appreciate:

A) a foreign currency investment is more likely to show a higher effective rate of return compared with . a domestic investment, than it would if the foreign currency were expected to depreciate
B) a domestic currency investment is more likely to show a higher effective rate of return compared . with a foreign investment, than it would if the foreign currency were expected to depreciate
C) a foreign currency investment is less likely to show a higher effective rate of return compared with a . domestic investment, than it would if the foreign currency were expected to depreciate
D) a foreign currency investment will definitely show a higher effective rate of return compared with a domestic investment

Question 13

If the foreign currency is expected to depreciate:

A) a foreign currency investment is more likely to show a higher effective rate of return compared with . a domestic investment, than it would if the foreign currency were expected to appreciate
B) a domestic currency investment is more likely to show a lower effective rate of return compared . with a foreign investment, than it would if the foreign currency were expected to appreciate
C) a foreign currency investment is less likely to show a higher effective rate of return compared with a . domestic investment, than it would if the foreign currency were expected to appreciate
D) a foreign currency investment will definitely show a higher effective rate of return compared with a domestic investment

Question 14

If the foreign currency is expected to appreciate:

A) a borrower is more likely to borrow foreign currency, than if the foreign currency were expected to depreciate
B) a borrower is less likely to borrow foreign currency, than if the foreign currency were expected to depreciate
C) a borrower is less likely to borrow domestic currency, than if the foreign currency were expected to depreciate
D) a borrower will definitely borrow domestic currency rather than foreign currency

Question 15

If the foreign currency is expected to depreciate:

A) a borrower is more likely to borrow foreign currency, than if the foreign currency were expected to appreciate
B) a borrower is less likely to borrow foreign currency, than if the foreign currency were expected to appreciate
C) a borrower is more likely to borrow domestic currency, than if the foreign currency were expected to appreciate
D) a borrower will definitely borrow domestic currency rather than foreign currency

Question 16

There are several problems associated with forecasting exchange rates using single-equation econometric models, including:

A) they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined
B) they are very expensive models to run
C) they may be conditional on the future value of the explanatory variables
D) they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined AND they may be conditional on the future value of the explanatory variables

Question 17

Which of the following describes an econometric model of exchange rate forecasting?

A) a model based on the PPP hypothesis
B) a model based on the previous history of the exchange rate
C) a model based on chart formations
D) a model based on the high, low and close values of the exchange rate

Question 18

The major problem with time-series forecasting is that:

A) if the foreign exchange market is weakly efficient, exchange rates will follow a random walk
B) they are too complicated
C) they quickly get out of date
D) they require too much data to compute

Question 19

The effectiveness of the spot rate as a market based forecast relies on:

A) the validity of the covered interest parity hypothesis
B) the validity of the purchasing power parity hypothesis
C) the validity of the random walk hypothesis
D) the forward market efficiency

Question 20

The effectiveness of the forward rate as a market based forecast relies on:

A) the validity of the covered interest parity hypothesis
B) the validity of the purchasing power parity hypothesis
C) the validity of the random walk hypothesis
D) the forward market efficiency

Question 21

Market efficiency will hold if:

A) the forward rate is an unbiased and efficient forecaster of the spot exchange rate
B) if the forward rate equals the current spot rate
C) if the forward rate is greater than the current spot rate
D) if biased efficiency holds

Question 22

If the forward rate is used as a forecaster of the spot rate:

A) the forecasting error equals the difference between the current spot rate and the forward rate at the maturity of the forward contract
B) the forecasting error equals the difference between the current forward rate and the spot rate at the maturity of the forward contract
C) the forecasting error equals the difference between the current forward rate and the current spot rate
D) none of the given answers

Question 23

The difference between judgmental forecasting and econometric forecasting is that the former:

A) takes into account qualitative factors only
B) is less accurate but cheaper
C) is not based on a formal model
D) is used for short-term forecasting only

Question 24

Which of the following is NOT a reason for using composite forecasting?

A) different forecasters possess different information and forecasting ability
B) different forecasts differ in forecasting accuracy
C) diversification reduces the risk of large forecasting error
D) the greater the forecast sample the greater the consensus

Question 25

Composite forecasting is used because:

A) different forecasters have different forecasting accuracy
B) diversification reduces the risk associated with forecasting accuracy
C) combining technical and fundamental forecasting produces better forecasting results than using any one technique
D) all of the answers given

Question 26

Which of the measures below is NOT a measure of forecasting accuracy?

A) the mean absolute error
B) the standard variation
C) the mean square error
D) the root mean square error

Question 27

Which of the following statement is NOT true?

A) Forecasting is an important input in decision making
B) Meese and Rogoff found forecasting models of exchange rates perform poorly out-of-sample
C) Boughton found that for the USD SDR exchange rate some fundamental exchange rate models . performed better than the random walk in out-of-sample testing
D) MacDonald and Taylor used an error correction model to show that the monetary model can. forecast no better than the random walk model

Question 28

Which of the following is NOT an argument put forward by technical analysts as a reason for ignoring information on the fundamental variables affecting the exchange rate?

A) Fundamental variables affect the exchange rate in the long run only
B) The information contains significant errors
C) It is not easy to pinpoint all of the fundamental variables
D) Some of the fundamental variables cannot be measured

Question 29

The foreign exchange market is said to be in a trading range when:

A) the tops and bottoms are at the same level
B) traders can buy at the bottom and sell at the top
C) the exchange rate moves between the upper and lower limits allowed by the underlying exchange rate arrangement
D) the trading volume is extremely high

Question 30

Which of the following statements is NOT true?

A) Flags are continuous patterns
B) The flag's pole has to be a continuation of a previous trend
C) A flag occurs when major trends are interrupted
D) Flags provide an unambiguous buy signal

Question 31

Which of the following statements is NOT true?

A) Triangles can be ascending descending or symmetrical
B) A symmetrical triangle provides an ambiguous signal
C) A symmetrical triangle provides an unambiguous signal
D) An ascending triangle occurs when buyers come into the market at progressively higher levels while sellers get out at the same level

Question 32

An imminent trend reversal is indicated when the exchange rate breaks through:

A) the lower line of the channel in a bear market
B) the upper line of the channel in a bull market
C) the upper line of the channel in a bear market
D) all of the given answers

Question 33

Which of the following is NOT a feature of the head and shoulders formation?

A) It comes after a prolonged upward change
B) The head must be higher than the tops of the shoulders on either side
C) It must be followed by a reverse head and shoulders formation
D) The shoulder tops must be at approximately equal levels

Question 34

A 5.00% filter rule requires buying a currency when it:

A) appreciates by 5.00% above its average value over the past period
B) appreciates by 5.00% from its recent trough
C) depreciates by 5.00% from its recent peak
D) depreciates by 5.00% from the average over the past period

Question 35

A 1.00% filter rule requires selling a currency when it:

A) appreciates by 1.00% above its average value over the past period
B) appreciates by 1.00% from its recent trough
C) depreciates by 1.00% from its recent peak
D) depreciates by 1.00% below the average over the past period

Question 36

A single moving average rule requires buying a currency when:

A) the moving average cuts the exchange rate from below
B) the exchange rate is equal to the moving average
C) the moving average cuts the exchange rate from above
D) none of the given answers

Question 37

A single moving average rule requires selling a currency when:

A) the moving average cuts the exchange rate from below
B) the exchange rate is equal to the moving average
C) the moving average cuts then exchange rate from above
D) none of the given answers

Question 38

A double moving average rule requires buying a currency when:

A) the long moving average cuts the short moving average from below
B) the short moving average is equal to the long moving average
C) the long moving average cuts the short moving average from above
D) none of the given answers

Question 39

A double moving average rule requires selling a currency when:

A) the long moving average cuts the short moving average from below
B) the short moving average is equal to the long moving average
C) the long moving average cuts the short moving average from above
D) none of the given answers