Question
An asset manager has conducted an extensive econometric study and proposes a forecasting model. He has found that a currency with a high interest rate
An asset manager has conducted an extensive econometric study and proposes a forecasting model. He has found that a currency with a high interest rate tends to depreciate relative to a currency with a low interest rate. The simple forecasting model for the one-year exchange rate is that a currency should appreciate over the year by the amount of the interest rate differential quoted today. For example, if the Australian dollar exchange rate is AUD/$ = 2 and the one-year interest rates in AUD and $ are 8% and 3%, respectively, the U.S dollar should move up by 5% relative to the Australian dollar, and your forecast for the exchange rate at the end of the year is AUD/$ = 2.17. What is the current forward exchange rate?
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