Textbook Problem

Forecasting Based on PPP versus the Forward Rate You believe that the Singapore dollar’s exchange rate movements are mostly attributable to purchasing power parity. Today the nominal annual interest rate in Singapore is 18 percent, compared to 3 percent in the United States. You expect that annual inflation will be approximately 4 percent in Singapore and 1 percent in the United States. Assume that interest rate parity holds. Today the spot rate of the Singapore dollar is $0.63. Do you think the one-year forward rate would underestimate, overestimate, or be an unbiased estimate of the future spot rate in one year? Explain.