A quantitative analyst at a foreign exchange (FX) trading company is developing a new factor model to be used for estimating potential risk exposures on FX trades. The analyst is evaluating potential factors to use in the model, and their effects on the performance of the model. Which of the following statements is most likely correct for the analyst to consider when developing the model?

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Using a large number of underlying factors will allow the model to correctly predict future exchange rates.

The most important factor in predicting a country's interest rates is the political stability of the country.

The pair-wise exchange rates for currencies of developed countries can be assumed to be constant for terms shorter than 3 months.

The value of a country's currency will be negatively correlated with a factor representing changes in that country's money supply.

Financial Risk Manager Part 1