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Selecting between forecast methods. Suppose Bolivia has a nominal one-year risk-free interest rate of 40%, which is primarily due to the high level of expected inflation. The euro nominal one-year risk- free interest rate is 8%. The spot rate of Bolivia's currency (called the boliviana) is 0.14 euro. The one-year forward rate of the boliviana is 0.108 euro. What is the forecasted percentage change in the boliviana if the spot rate is used as a one-year forecast? What is the forecasted percentage change in the boliviana if the one-year forward rate is used as a one-year forecast? Which forecast do you think will be more accurate? Why?

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