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 states that the forward rate and the spot rate should be equal based on the interest rate differential between two currencies. The international Fisher effect predicts that the difference in interest rates between two countries should equal the expected change in exchange rates. Therefore, if interest rate parity holds, the forward rate should be equal to the predicted spot rate and the answer is C.

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