Selecting between Forecast Methods Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot rate of Bolivia’s currency (called the boliviano) is $0.14. The one-year forward rate of the boliviano is $0.108. What is the forecasted percentage change in the boliviano if the spot rate is used as a one-year forecast? What is the forecasted percentage change in the boliviano if the one-year forward rate is used as a one-year forecast? Which forecast do you think will be more accurate? Why?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 9, Problem 24QA
Textbook Problem

Selecting between Forecast Methods Bolivia currently has a nominal one-year risk-free interest rate of 40 percent, which is primarily due to the high level of expected inflation. The U.S. nominal one-year risk-free interest rate is 8 percent. The spot rate of Bolivia’s currency (called the boliviano) is $0.14. The one-year forward rate of the boliviano is $0.108. What is the forecasted percentage change in the boliviano if the spot rate is used as a one-year forecast? What is the forecasted percentage change in the boliviano if the one-year forward rate is used as a one-year forecast? Which forecast do you think will be more accurate? Why?

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