1. (a) Explain the rationale for exchange rate forecasting and the motives of global banking firms and asset managers for forecasting exchange rates. [15 marks]

(b) Compare and contrast the technical technique for forecasting exchange rates versus the fundamental approach to exchange rate forecasting. What are the limitations (i.e., problems) with using these techniques to forecast exchange rates? What advantage, if any, does the time series approach have over the technical and fundamental techniques for forecasting exchange rates? [20 marks]

(c) Financial economists at Horizon Capital believe that due to the recent surge in U.K. inflation rates that future real interest rate movements will affect exchange rates and have applied regression analysis to historical data to evaluate the relationship. The economists intend to use the regression coefficients derived from their econometric analysis together with forecasted real interest rate movements in order to forecast exchange rates in the future. Explain at least three limitations of this technique. [10 marks]