Ninel Khan, a technical trader, is analyzing the seasonality of the price of the GBP/USD. Khan believes the price is significantly different in the first quarter compared to the other three quarters. She uses the first quarter as the reference point in the regression. The number of dummy variables that Khan will need in her regression equation is:

A. 2
B. 3
C. 4

Correct Answer: B

If we need to differentiate among n categories, the regression should include n ? 1 dummy variables. In this case, we have four quarters. Thus, three dummy variables are needed.