It is well known that forex forecasters perform poorly. See page 161 of Solnik's book. In one of the surveys by Euromoney it is stated that prediction of correct signals was only 44.9%, worse than the toss of coin. In our student managed hedge fund we are focusing on emerging markets and chose ELD and EEM ETFs, both are ESG ETFs satisfying our mission to support human dignity and the common good. To enhance asset returns from ELD and EEM, one can use the Art and Science of forecasting exchange rate that are directionally correct and magnitudinally precise.

Refer to the following scenario.

T=0 T=90

S₀=$1.34/€ S₉₀=$1.38/€

F₀=$1.40/€

E(S₉₀)=$1.33/€

i. If you listen to the market, what would you do? What is your profit or loss in that case?

ii. If you listen to the experts, what would you do? What is your profit or loss in that case?

iii. Which forecast makes better prediction in terms of precision and direction?

iv. Which forecast makes better prediction in terms of profit generation?

v. Can you reconcile your answers to iii & iv? Elaborate.