What will be probability distribution of the yens change

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Reference no: EM13936062

Probability distribution of forecasts. Assume that the following regression model was applied to histori- cal quarterly data:

et ¼ a0 þ a1INTt þ a2INFt-1 þ mt

where

et ¼ percentage change in the exchange rate of the Japanese yen in period t

INTt ¼ average real interest rate differential (UK interest rate minus Japanese interest rate) over period t

INFt21 ¼ inflation differential (UK inflation rate minus Japanese inflation rate) in the previous period

a0, a1, a2 ¼ regression coefficients

mt ¼ error term.

Assume that the regression coefficients were esti- mated as follows:

a0 ¼ 0:0

a1 ¼ 0:9

a2 ¼ 0:8

Also assume that the inflation differential in the most recent period was 3%. 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 Ltd uses this information to forecast the Japanese yen's exchange rate, what will be the probability distribution of the yen's percentage change over the upcoming period?

Reference no: EM13936062

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