Question

Which of the following statements is correct?

A. The spot rate is a useful market-based forecast if the expected percentage change in the currency is zero over the forecast period.
B. There are three main types of methods to forecast exchange rates: technical forecasting, fundamental forecasting, and market-based forecasting. These three methods always make the same directional prediction regarding whether a currency is appreciating or depreciating.
C. Forward rate should provide more accurate forecasts for currencies in low-inflation countries than the spot rate.
D. Technical forecasting is based on a wide range of data regarded as fundamental economic variables that determine exchange rates. In contrast, fundamental forecasting focuses on a much smaller set of data, typically the historical exchange rates.
E. Technical forecasting models can reliably forecast long-run exchange rates.

Answer 1

The correct statement is A, where the spot rate can serve as a market-based forecast if no change in currency value is expected. Statements B, C, D, and E contain inaccuracies regarding forecasting methods and their reliability.

Step-by-step explanation:

The correct statement among the provided options is A: The spot rate is a useful market-based forecast if the expected percentage change in the currency is zero over the forecast period. This is because when investors do not expect any change in the currency value, the spot rate reflects the current market consensus.

It's important to clarify that option B is incorrect because the three forecasting methods (technical, fundamental, and market-based) do not always predict the same direction of currency movement. C is misleading because forward rates, while related to inflation expectations and interest differentials, do not necessarily provide more accurate forecasts than spot rates.

D is inaccurate as technical forecasting bases predictions on historical price movements and trends, whereas fundamental forecasting relies on economic variables. Lastly, E is false because technical forecasting is generally not reliable for predicting long-term exchange rates due to the influence of unforeseen economic factors and market conditions.