According to the expectations theory of exchange rates, what change is expected in the future spot exchange rate if the current spot rate is 8% lower than the forward exchange rate?
A)Future spot rate is expected to increase by 8%
B)Future spot rate is expected to decrease by 8%
C)Future spot rate is expected to decrease by 4%
D)No change is expected in the future spot rate Difference between forward and spot rates = Expected change in spot rates

Question

Quizplus · Accepted Answer

According to the expectations theory of exchange rates, if the current spot rate is lower than the forward rate, the market expects the spot rate to increase in the future by the difference between the forward and spot rates. Therefore, if the current spot rate is 8% lower than the forward rate, the market expects the future spot rate to increase by 8%.

According to the Expectations Theory of Exchange Rates, What Change