Question: What are the problems associated with using econometric models for forecasting exchange rates? You believe that the U.S. dollar will strongly depreciate against the euro

  1. What are the problems associated with using econometric models for forecasting exchange rates?
  2. You believe that the U.S. dollar will strongly depreciate against the euro in the next few weeks. What action can you take?
  3. Consider the following quotes.

  4. Spot rate: $1.5000/ Six month forward rate: $1.5625/

    Six month U.S. interest rate: 6.000% p.a. Six month U.K. interest rate: 5.000% p.a.

    a. Does interest rate parity hold?

    b. If not, show the covered interest arbitrage. Use the equivalent of $50,000.

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