Answer-first summary for fast verification
Answer: The value of a country's currency will be negatively correlated with a factor representing changes in that country's money supply.
D is correct. As described in the text, "If Country A increases its money supply by 25% while Country B keeps its money supply unchanged, the value of Country A's currency will tend to decline by 25% relative to Country B's currency." This indicates that there is a negative correlation between the value of a country's currency and changes in its money supply. An increase in the money supply typically leads to a decrease in the value of the currency due to the law of supply and demand; more currency available can lead to inflation and a decrease in the currency's purchasing power. The other options are incorrect because predicting future exchange rates with precision is not feasible (A), political stability is not the most important factor in predicting interest rates (B), and exchange rates are subject to change even in short-term time horizons (C).
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
A quantitative analyst employed at a foreign exchange (Fx) trading firm is tasked with developing an innovative factor model to evaluate potential risks linked to FX transactions. During this development, the analyst is examining different factors that could be included in the model and evaluating their influence on its overall effectiveness. Which of the following statements would be the most accurate for the analyst to consider when constructing the model?
A
Using a large number of underlying factors will allow the model to correctly predict future exchange rates.
B
The most important factor in predicting a country's interest rates is the political stability of the country.
C
The pair-wise exchange rates for currencies of developed countries can be assumed to be constant for terms shorter than 3 months.
D
The value of a country's currency will be negatively correlated with a factor representing changes in that country's money supply.
No comments yet.