The expectations hypothesis states that the forward rate over second period is:
A) set to the spot rate expected to prevail over the second period.
B) equal to the first period spot rate.
C) always greater than the spot rate in period one.
D) always greater than the period 3 forward rate.

Question

Quizplus · Accepted Answer

The expectations hypothesis suggests that the forward rate for a future period is an unbiased predictor of the future spot rate for that period. Therefore, it is set to the spot rate expected to prevail over the second period.

The Expectations Hypothesis States That the Forward Rate Over Second