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) The future spot rate is expected to increase by 8%.
B) The future spot rate is expected to decrease by 8%.
C) The future spot rate is expected to decrease by 4%.
D)No change is expected in the future spot rate.

Question

Quizplus · Accepted Answer

The expectations theory of exchange rates suggests that the future spot rate is expected to adjust towards the forward rate. If the current spot rate is 8% lower than the forward rate, it implies that the market expects the currency to appreciate in the future, hence the future spot rate is expected to increase by 8% to align with the forward rate.

According to the Expectations Theory of Exchange Rates, What Change