Probability Distribution of Forecasts Assume that the following regression model was applied to historical quarterly data:

et ¼ a0 þ a1INTt þ a2INFt1 þ μt where et ¼ percentage change in the exchange rate of the Japanese yen in period t INTt ¼ average real interest rate differential ðU:S: interest rate minus Japanese interest rateÞ over period t INFt1 ¼ inflation differential

ðU:S: inflation rate minus Japanese inflation rateÞ in the previous period a0; a1; a2 ¼ regression coefficients

μt ¼ error term Assume that the regression coefficients were estimated as follows:

a0 ¼ :0 a1 ¼ :9 a2 ¼ :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 probability distribution of the yen’s percentage change over the upcoming period?