CA Final · Advanced Financial Management · International Financial Management
Under the unbiased forward rate theory, what does the forward rate for a currency represent?
Under the unbiased forward rate theory, the forward exchange rate is the market's unbiased estimate of the future spot rate, so on average the forward rate equals the spot rate that actually materialises, apart from random errors.
- AThe rate fixed by the central bank for hedging
- BThe market's unbiased predictor of the future spot rateCorrect
- CThe spot rate adjusted for the bank's profit margin
- DThe rate that equals the inflation differential between two countries
Explanation
The unbiased forward rate theory holds that the forward rate equals the expected future spot rate, so it is an unbiased predictor. Inflation differentials relate to purchasing power parity, not this theory.
Did you get it right without looking?
One question tells you little. A timed set on International Financial Management shows your real accuracy, how long you take and where you lose marks.
More International Financial Management questions
- India's annual inflation is expected to be 6% and the United States' annual inflation 2%. The spot rate is Rs 80 per USD. Under relative pur…
- Spot INR/USD is ₹80.00. Expected annual inflation is 6% in India and 2% in the US. Under relative purchasing power parity, the expected spot…
- Spot is ₹80.00/USD. One-year interest rates are 9% in India and 4% in the USA. By interest rate parity, the one-year forward rate is closest…
- Which statement correctly describes covered interest rate parity?
- Sagar Industries Ltd is considering a foreign project. Initial outlay is Rs 500 lakh. Expected annual operating cash flow is Rs 160 lakh for…
- Which statement correctly describes the international Fisher effect?