Forecast Error Royce Co. is a U.S. firm with future receivables 1 year from now in Canadian dollars and British pounds. Its pound receivables are known with certainty, and its estimated Canadian dollar receivables are subject to a 2 percent error in either direction. The dollar values of both types of receivables are similar. There is no chance of default by the customers involved. Royce’s treasurer says that the estimate of dollar cash flows to be generated from the British pound receivables is subject to greater uncertainty than that of the Canadian dollar receivables. Explain the rationale for the treasurer’s statement.
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