The value of each Latin American currency relative to the dollar is dictated by
ID: 2713236 • Letter: T
Question
The value of each Latin American currency relative to the dollar is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generally declined substantially against the dollar over time. Most of these countries have high inflation rates and high interest rates. The data on inflation rates, economic growth, and other economic indicators are subject to error, because limited resources are used to compile the data.
a. If the forward rate is used as a market-based forecast, will this rate result in a forecast of appreciation, depreciation, or no change in any particular Latin American currency? Explain.
b. If technical forecasting is used, will this result in a forecast of appreciation, depreciation, or no change in the value of a specific Latin American currency? Explain.
c. Do you think that U.S. firms can accurately forecast the future values of Latin American currencies
Explanation / Answer
As Latin American interest rate higher Compared to interest rate of US as forward rate of American currency (Latin) have at huge discount. Discount is termed as % change in currency (Latin American) over period of time as per forward contract. As Latin American currencies have declined constantly in past , and all the methods (technical) are applicable based on the past trends into future. So that is reason , technical forecasting resulted into forecast of depreciation.
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