The condition stating that the current forward rate is an unbiased predictor of the future spot...

The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:

		the unbiased forward rates condition.
		uncovered interest rate parity.
		the international Fisher effect.
		purchasing power parity.
		interest rate parity.

Expert Solution

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Answer: unbiased forward rates condition.

unbiased forward rates condition states that the current forward rate is an unbiased predictor of the future spot exchange rate.

Remaining options are incorrect:

Reason:

Purchasing power parity:

It is the relationship between: inflation rate of two countries, spot exchange rate and expected spot exchange rate.

This is based on the law of one price. That is the prevention of the commodity Arbitrage.

Interest rate parity:

As per Interest rate parity the difference in spot fate and forward rate exits due to differences in interest rate between two countries.

The IFE suggests that a currency's spot rate will change according to interest rate differentials.

IFE is the relationship between the Interest rate and inflation.

jeff jeffy answered 2 years ago

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