Since the forward rate does not capture the nominal interest rate between two countries, it should provide a less accurate forecast for currencies in high-inflation countries than the spot rate.

Question

Quizplus · Accepted Answer

The forward rate inherently reflects the interest rate differential between two countries, as it is determined by the relative interest rates of the currencies involved, not by inflation rates directly. Therefore, it can provide a more accurate forecast for currency movements, including those in high-inflation countries, by incorporating expectations about future interest rates and inflation.

Since the Forward Rate Does Not Capture the Nominal Interest