The forward foreign exchange rate
A) Determines the future spot exchange rate.
B) Is unaffected by changes in interest rates.
C) Is the ratio of equivalent spot amounts in each currency compounded to the forward maturity at the respective currencies' spot rates.
D) Is the rate that ensures that future expected purchasing power will be in parity.

Question

Quizplus · Accepted Answer

The forward foreign exchange rate is the ratio of equivalent spot amounts in each currency compounded to the forward maturity at the respective currencies' spot rates. It allows two parties to agree on an exchange rate for a future date when a transaction is going to take place. This helps them to hedge against the risk of currency fluctuations. The forward exchange rate is based on interest rate differentials between the two currencies, which means that it is affected by changes in interest rates. It does not determine the future spot exchange rate or ensure that future expected purchasing power will be in parity.

The Forward Foreign Exchange Rate