Gamma Corporation Has Incurred Large Losses Over the Last Ten $S_{t}=a_{0}+a_{1} F_{t-1}+µ t$

question 48

Multiple Choice

Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuations of the Egyptian pound (EGP) ,even though the company has used a market-based forecast based on the forward rate.Consequently,management believes its forecasts to be biased.The following regression model was estimated to determine if the forecasts over the last ten years were biased:
$S_{t}=a_{0}+a_{1} F_{t-1}+µ t$
Where is the spot rate of the pound in year t and is the forward rate of the pound in year t-1.Regression results reveal coefficients of 0 and 1.3.Thus,Gamma has reason to believe that its past forecasts have ______________ the realized spot rate.
where $S_{t}$ is the spot rate of the pound in year $t$ and $F_{t-1}$ is the forward rate of the pound in year $t$ 1. Regression results reveal coefficients of $a_{0}=0$ and $a_{1}=1.3$ . Thus, Gamma has reason to believe that its past forecasts have the realized spot rate.

• A) overestimated
• B) underestimated
• C) correctly estimated
• D) none of the above

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Definitions:

Perpetual Inventory System

A system for tracking inventory accounting that instantly logs each sale or acquisition of inventory through computerized point-of-sale systems and software for managing enterprise assets.

LIFO

A rephrased definition: An accounting approach to inventory and cost of goods sold valuation that assumes the most recently acquired items are the first to be sold.

Ending Inventory

The value of goods available for sale or use at the end of an accounting period.

Net Realizable Value

The projected sales price of products subtracted by the cost associated with their sale or disposal.