# 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.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 9, Problem 17QA
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.

This textbook solution is under construction.

## Expert Solution

### Want to see the full answer?

Check out a sample textbook solution.

### Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.