Assume that the following regression model was applied to historical quarterly data:

Assume that the regression coefficients were estimated as follows:

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:

If Stillwater, Inc., 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?

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where e=ao+aINT+ + aINF+-1+H+ e, percentage change in the exchange rate of the Japanese yen in period t INT, average real interest rate differential (U.S. interest rate minus Japanese interest rate) over period t INF-1=inflation differential (U.S. inflation rate minus Japanese inflation rate) in the previous period = ao, a, a regression coefficients = error term