Forward versus Spot Rate Forecast Assume that interest rate parity exists. The one-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2 percent inflation rate and the United States will experience a 2 percent inflation rate over the next year. If you wanted to forecast the Singapore dollar’s spot rate for one year ahead, do you think that the forecast error would be smaller when using today’s one-year forward rate of the Singapore dollar as the forecast or when using today’s spot rate as the forecast? Briefly explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 9, Problem 32QA
Textbook Problem

Forward versus Spot Rate Forecast Assume that interest rate parity exists. The one-year risk-free interest rate in the United States is 3 percent versus 16 percent in Singapore. You believe in purchasing power parity, and you also believe that Singapore will experience a 2 percent inflation rate and the United States will experience a 2 percent inflation rate over the next year. If you wanted to forecast the Singapore dollar’s spot rate for one year ahead, do you think that the forecast error would be smaller when using today’s one-year forward rate of the Singapore dollar as the forecast or when using today’s spot rate as the forecast? Briefly explain.

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