Forecast Errors from Forward Rates Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40, whereas the spot rate of the Japanese yen was $0.01. At that time, the one-year interest rate of the euro and the Japanese yen was 3 percent, compared to 7 percent for the one-year U.S. interest rate. One year ago, you used the one-year forward rate of the euro to derive a forecast of the future spot rate of the euro and the yen one year ahead. Today the spot rate of the euro is $1.39 and the spot rate of the yen is $0.009. Which currency did you forecast more accurately?
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