Question

Period 1	Fundamental Model: Predicted Value of Bulgarian lev	Spot Rate Model: Predicted Value of Bulgarian lev	Actual value of Bulgarian lev
1	US$ 0.52	US$ 0.50	US$ 0.50
2	$0.54	$0.50	$0.60
3	$0.44	$0.60	$0.50
4	$0.566	$0.50	$0.50

Using the mean % absolute forecast error, determine which model is better at forecasting the value of the Bulgarian lev.

Answer 1

Mean % absolute error is calculated as average absolute percentage error for each time period. So, it is (summation of (A(i)-F(i))/A(i))/n; where A(i) is Actual value, F(i) is Forecast value and n is the number of time periods.

Calculating for Period Fundemental Model, we get (mod((0.5-0.52)/0.5)+mod((0.6-0.54)/0.6)+mod((0.5-0.44)/0.5)+mod((0.5-0.566)/0.5))/4= (0.04+0.1+0.12+0.132)/4= 0.098= 9.8%

Calculating for Spot Rate Model, we get (mod((0.5-0.5)/0.5)+mod((0.6-0.5)/0.6)+mod((0.5-0.6)/0.5)+mod((0.5-0.5)/0.5))/4= (0+0.166+0.2+0)/4= 0.091667= 9.1667%

So, as mean % absolute error of Period Fundemental Model is better, we can determine that Period Fundemental Model is better at forecasting the value of Bulgarian lev.