Expected yens percentage change over the upcoming period

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Reference no: EM131510734

Assume that the following regression model was applied to historical quarterly data: et = a0 + a1INTt + a2INFt-1 + mt where et = percentage change in the exchange rate of the Japanese yen in period t INTt = average real interest rate differential (U.S. interest rate minus Japanese interest rate) over period t INFt-1 = inflation differential (U.S. inflation rate minus Japanese inflation rate) in the previous period a0, a1, a2 = regression coefficients mt = error term Assume that the regression coefficients were estimated as follows: a0 = 0.0 a1 = 0.9 a2 = 0.8 Also assume that the inflation differential in the most recent period was 3 percent. The real interest rate differential in the upcoming period is forecasted as follows: Interest Rate Differential Probability 0% 30% 1 60 2 10 If Stillwater, Inc., uses this information to forecast the Japanese yen’s exchange rate, what will be the expected yen’s percentage change over the upcoming period? 3.12% 2.4% 3.3% 4.2%

Reference no: EM131510734

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