1. (a) Use the following information provided here below to answer the questions that follow (5 points): CURRENCY Canadian dollar Japanese yen 90-DAY FORWARD RATE $0.86 $0.014 SPOT RATE THAT OCCURRED 90 DAYS LATER $0.89 $0.012 Assuming the forward rate was used to forecast the future spot rate, determine whether the Canadian dollar or the Japanese yen was forecasted with more accuracy, based on the absolute forecast error as a percentage of the realized value. (b) Assume that the four-year annualized interest rate in the United States is 11 percent and the four-year annualized interest rate in Singapore is 8 percent. Assume interest rate parity holds for a four-year horizon. Assume that the spot rate of the Singapore dollar is $0.82. (i) If the forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollar's spot rate in four years? (3 points). (ii) What percentage appreciation or depreciation does this forecast imply over the four-year period? (2 points). (c) Assume that the following regression model was applied to historical quarterly data: e,a,+a,INT,+ aINF +H t-1 where e, INT INF apa, a percentage change in the exchange rate of the Japanese yen in period t average real interest rate differential (U.S. interest rate minus Japanese interest rate) over period t inflation differential (U.S. inflation rate minus Japanese inflation rate) in the previous period regression coefficients Herror term Assume that the regression coefficients were estimated as follows: 0.0 0.6 0.4 Also assume that the inflation differential in the most recent period was 5 percent. The real interest rate differential in the upcoming period is forecasted as follows: Interest Rate Differential 0% 2 2 Probability 10% 720 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? (10 points).