If interest rate parity holds,then the one-year forward rate of a currency will ______ 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 exchange rate. The international Fisher effect (IFE) suggests that the difference in nominal interest rates between two countries should be reflected in the expected change in the exchange rate. Therefore, if IRP holds, the anticipated change in the spot rate according to the IFE will be equal to the one-year forward rate. Consequently, the answer is C - equal to.

If Interest Rate Parity Holds,then the One-Year Forward Rate of a Currency