An investor who can correctly forecast the direction and size of changes in foreign currency exchange rates is able to reap huge profits in the international currency markets. A knowledgeable reader of the Wall Street Journal (in particular, of the currency futures market quotations) can determine the direction of change in various exchange rates that is predicted by all investors, viewed collectively. Predictions from 216 investors, together with the subsequent actual directions of change, were recorded in the following way: Column 1: predicted change where 1 = positive and 2 = negative; column 2: actual change where 1 = positive and 2 = negative.
a. Can we infer at the 10% significance level that a relationship exists between the predicted and actual directions of change?
b. To what extent would you make use of these predictions in formulating your forecasts of future exchange rate changes?

  • CreatedFebruary 03, 2015
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