Answer Happy

8. Uncertainty of forecasts Suppose that Chance Co believes that movements in the value of the British pound (as measured by percentage change from the previous quarter) er, are dictated entirely by the inflation rate differential between the pound and the US dollar in the current quarter In That is the tem uses the Following repression equation to forecast the change in the value of the pound in 3 months i bo+by Inf, thi Where is the error term and bu is a constant. Suppose that Chance Co. estimates ho to be 0.0 and b, to be 0.7. Chance Co seeks to conduct a sensitivity analysis. The MNC determines that there are 3 possible values for the inflation differential in 3 months, each with a certain probability of occuring. This data is summarized in the following table. Complete the sensitivity analysis by entering the remaining expected exchange rate movements. Then answer the question that follows. Possible Value of Inflation Differential Expected Exchange Rate Movement (INF) Probability of Occurrence (0) 20.00% 2% 60.00% 4% 20.00% percent 1% percent 1.4 While the best guess for the expected exchange rate movement is percent, the sensitivity analysis specifies the possible other values for the pound's exchange rate movement.