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 suggests that the difference in interest rates between two currencies will be offset by the forward exchange rate. According to the international Fisher effect, the expected change in the exchange rate is equal to the difference in interest rates between two currencies. Therefore, if interest rate parity holds, the one-year forward rate of a currency will be equal to the predicted spot rate of the currency in one year according to the international Fisher effect.

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