The forward expectations parity states that:
A) any forward premium or discount is equal to the expected change in the exchange rate.
B) any forward rate is equal to the expected change in the exchange rate.
C) the forward premium or discount is equal to the expected change in the real exchange rates.
D) the forward premium or discount is equal to the expected change in purchasing power parity.

Question

Quizplus · Accepted Answer

The forward expectations parity states that any forward premium or discount is equal to the expected change in the exchange rate. This means that if the forward rate is higher than the spot rate, the currency is said to be trading at a forward premium, which implies that traders expect the future exchange rate to be higher than the current rate. Conversely, if the forward rate is lower than the spot rate, the currency is trading at a discount, indicating that traders expect the future exchange rate to be lower than the current rate. Hence, the forward premium or discount is equal to the expected change in the exchange rate.

The Forward Expectations Parity States That