1. b) What would you conclude about the predictive accuracy of JPMorgan Chases spot exchange rate forecasts? Are the forecasts accurate enough to trade profitably over the time period?

JPMorgan Chase generates the following set of forecasts for the future spot exchange rate (Figures 1 and 2): Figure 1: US$/ $1.40 1.38 21.32 130 1.32 $1.30 1.27 Actual Spot Rate $1.20 23 1.19 1.19 1.16 $1.10 1.13 1.07 $1.00 0.9871.001.01 $0.90 JPMC's forecast of the spot rate 90 days into the future 0909, $0.80 5/24/05 3/1/05 11/20/04 20/20/11 8/08/02 2/14/02 5/16/02 Figure 2: Japanese Yen per U.S. Dollar 2/13/03 5/15/03 8/14/03 11/13/03 2/12/04 5/13/04 8/19/04 133 JPMC's forecast of the spot rate 90 days into the future 128 126 126.4 121 122.3 121 1227/121.3 119 120 118 116.3 116 117 113 Actual Spot Rate 108 108.7 105.7 106 105 105 104 104 8/19/04 11/20/04 5/13/04 2/12/04 8/14/03 11/13/03 2/13/03 5/15/03 5/16/02 8/08/02 11/07/02 2/14/02 90/1/E 5/24/05 JPMorgan Chase generates the following set of forecasts for the future spot exchange rate (Figures 1 and 2): Figure 1: US$/ $1.40 1.38 21.32 130 1.32 $1.30 1.27 Actual Spot Rate $1.20 23 1.19 1.19 1.16 $1.10 1.13 1.07 $1.00 0.9871.001.01 $0.90 JPMC's forecast of the spot rate 90 days into the future 0909, $0.80 5/24/05 3/1/05 11/20/04 20/20/11 8/08/02 2/14/02 5/16/02 Figure 2: Japanese Yen per U.S. Dollar 2/13/03 5/15/03 8/14/03 11/13/03 2/12/04 5/13/04 8/19/04 133 JPMC's forecast of the spot rate 90 days into the future 128 126 126.4 121 122.3 121 1227/121.3 119 120 118 116.3 116 117 113 Actual Spot Rate 108 108.7 105.7 106 105 105 104 104 8/19/04 11/20/04 5/13/04 2/12/04 8/14/03 11/13/03 2/13/03 5/15/03 5/16/02 8/08/02 11/07/02 2/14/02 90/1/E 5/24/05