Under unbiased expectations theory, the expected future spot rate is

Question

Quizplus · Accepted Answer

According to the unbiased expectations theory, the expected future spot rate is equal to the forward rate. This implies that the market participants do not have any preference for either holding a spot or a forward contract, and they expect the same return from both instruments. Therefore, the forward rate fully reflects the expected future spot rate. Option A is incorrect because the mean of future spot rates may not necessarily coincide with the expected future spot rate. Option C is also incorrect because inflation affects the real interest rate and may not be a reliable predictor of expected spot rates. Option D is incorrect because the forward rate is not necessarily greater than the expected future spot rate under the unbiased expectations theory.

Under Unbiased Expectations Theory, the Expected Future Spot Rate Is