Understanding the BEER Model in Exchange Rate Analysis

Very Hard Currency Exchange Rates Exchange Rate Models

A multinational corporation, XYZ Inc., based in the United States, has significant business operations in Japan and is exposed to yen (JPY) fluctuations. The CFO is analyzing different models to forecast the future exchange rate between the US dollar (USD) and the Japanese yen (JPY) to optimize cash flows and manage currency risk. The CFO reads about several exchange rate models, focusing particularly on the differences between the Purchasing Power Parity (PPP) model, the Interest Rate Parity (IRP) model, and the Behavioral Equilibrium Exchange Rate (BEER) model.

In this context, which of the following statements correctly describes how the BEER model operates compared to the other models?

The BEER model focuses solely on relative prices and does not account for the impact of short-term interest differentials.

The BEER model incorporates fundamentals and market expectations but may diverge from actual exchange rates in the short run.

The BEER model predicts exchange rates strictly based on historical averages and does not adjust for real-time economic data.

Hint

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