Question

2. If I use the market approach to exchange rate forecasting, which of the following would I use to

predict future spot rates.

a. Past spot rates

b. GNP differences between countries

c. Forward Rates

d. Today’s rate is the expected future rate

e. Charting techniques

3. A large government deficit relative to GDP, a high rate of money expansion accompanied by

fixed exchange rates, along with substantial government expenditures are some of the common

characteristics of _________ risk.

a.exchange rate

b.interest rate

c.country

d.investment

Answer 1

2.c.Forward rate.

Forward rates would give us the future spot rates when market approach to exchange forecasting is used.

Forward rates usually upto one year are predicted using market based forecasting technique.

But, to forecast for a period beyond one year, interest rate differentials are generally used.

3.C. Country risk.

A large government deficit relative to GDP, a high rate of money expansion accompanied by

fixed exchange rates, along with substantial government expenditures are some of the common

characteristics of country risk.