The value of each Latin American currency relative to the dollar is dictated by
ID: 2790634 • 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
a.
The forward rate of each Latin American currency would have a large discount, thus highly depreciated, cause of the fact that the Latin American interest rate would be much higher than the U.S. interest rate. The discount noted above would serve as the forecast of the percentage change in the value of the Latin American currency over the length of time represented by the forward contract period.
b.
Technical methods generally apply past trends. In this case since Technical forecasting have shown that Latin American currencies declined consistently in the past, it would thus result in a forecast of depreciation.
c.
U.S. firms can forecast Latin American currency values accurately. This is because they have consistently been very volatile. U.S. firms generally have trouble even in forecasting the values of currencies of industrialized countries, in this case the values change in response to economic conditions and political scenarios, which are extremely volatile and much difficult to anticipate
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.