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Chapter 9

Q. 9.ST.2

Consider the following information:

Currency 90-Day Forward Rate Spot Rate That Occurred 90 Days Later
Canadian dollar $.80 $.82
Japanese yen $.012 $.011

Assuming the forward rate was used to forecast the future spot rate, determine whether the Canadian dollar or the Japanese yen was forecasted with more accuracy, based on the absolute forecast error as a percentage of the realized value.


Verified Solution

Canadian dollar \frac{| \$ .80- \$ .82|}{ \$ .82} = 2.44%

Japanese yen \frac{|\$ .012-\$ .011|}{\$ .011} = 9.09%

The forecast error was larger for the Japanese yen.