If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

Question

Quizplus · Accepted Answer

Interest rate parity (IRP) states that the difference in interest rates between two countries should be reflected in the forward rate. According to the international Fisher effect, the expected change in the exchange rate between two currencies is the difference in their nominal interest rates. Therefore, if IRP holds, the one-year forward rate should be equal to the predicted spot rate of the currency in one year based on the international Fisher effect. Hence, the correct answer is C, equal to.

If Interest Rate Parity Holds, Then the One-Year Forward Rate