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There are several problems associated with forecasting exchange rates using single- equation econometric models, including: O they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined AND they may be conditional on the future value of the explanatory variables they may be conditional on the future value of the explanatory variables they are very expensive models to run
There are several problems associated with forecasting exchange rates using single- equation econometric models, including: O they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined they explain the value of the exchange rate in terms of other variables, without explaining how these other variables are determined AND they may be conditional on the future value of the explanatory variables they may be conditional on the future value of the explanatory variables they are very expensive models to run
Expert Solution
The answer is B.
You can make use of multiple factors that affect currency movement and check that these factors relate to the exchange rate. Most of the factors used are based on economic theory, all the variables can be put in the model to generate a forecast. Although the model is complex and time consuming, its accuracy would be better than single factor models.
The single-factor models don't explain about determining other variables that can relate to currency movements.
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