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Question 21.FSE.1: New Hampshire Co. expects that monthly capital flows between...

New Hampshire Co. expects that monthly capital flows between the United States and Japan will be the major factor that affects the monthly exchange rate movements of the Japanese yen in the future, as money will fl ow to whichever country has the higher nominal interest rate. At the beginning of each month, New Hampshire Co. will use either the spot rate or the forward rate to forecast the future spot rate that will exist at the end of the month. Will the spot rate result in smaller, larger, or the same mean absolute forecast error as the forward rate when forecasting the future spot rate of the yen on a monthly basis? Explain.

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