Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

Question

Quizplus · Accepted Answer

In an efficient foreign exchange market, the spot rate reflects current market conditions and expectations, but the forward rate, which is agreed upon for future transactions, incorporates expectations about future changes in exchange rates due to interest rate differentials, inflation, and other economic factors. The forward rate is not simply a rational approximation of the future spot rate but is influenced by the interest rate parity, among other factors.

Given an Efficient Foreign Exchange Market, the Spot Rate Is