Forecasting Based on the IFE The prevailing one-year risk-free interest rate in Argentina is higher than the interest rate in the United States and will continue to be higher over time. Sycamore Co. believes the international Fisher effect can be used to derive the best forecast of the Argentine peso’s exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? 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 33QA
Textbook Problem

Forecasting Based on the IFE The prevailing one-year risk-free interest rate in Argentina is higher than the interest rate in the United States and will continue to be higher over time. Sycamore Co. believes the international Fisher effect can be used to derive the best forecast of the Argentine peso’s exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.

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