Bolivia currently has a nominal one$-$year risk$-$free interest rate of $50$ percent, which is primarily due to the high level of expected inflation. The U$.$S$.$ nominal one$-$year risk$-$free interest rate

is $7$ percent. The spot rate of Bolivia's currency $($called the boliviano$)$ is $$0\mathrm{.}15.$ The one$-$year forward rate of the boliviano is $$0\mathrm{.}107.$ What is the forecasted percentage change in the

boliviano if the spot rate is used as a one$-$year forecast? What is the forecasted percentage change in the boliviano if the one$-$year forward rate is used as a one$-$year forecast? Use a

minus sign to enter a negative value, if any. Round your answers to two decimal places.

The forecasted percentage change in the boliviano is

percent based on the spot rate, while the forecasted percentage change in the boliviano is

percent based on the

forward rate.

Which forecast do you think will be more accurate? Why?

The

rate should be a better forecast in this example because it captures the effect of expected inflation on the exchange rate. The

rate ignores this information.