mvgibbons1 posted a question Nov 10, 2013 at 5:34pm
Forward versus Spot Rate Forecast Assume that interest rate parity exists. The 1- year risk- free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2 percent inflation rate and the United States will experience a 2 percent inflation rate over the next year. If you wanted to forecast the Singapore dollar’s spot rate for 1 year ahead, do you think that the forecast error would be smaller when using today’s 1- year forward rate of the Singapore dollar as the forecast or using today’s spot rate as the forecast? Briefly explain.
answered the question Nov 10, 2013 at 11:50pm
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We need to forecast exchange rate after 1 year, therefore the error would be smaller if spot rate
and then finding out the forward rate using the current interest rate and inflation rate. This is...