You believe that the Singapore dollar's exchange rate movements are mostly attributed to purchasing power parity. Today the nominal annual interest rate in Singapore is $18$ percent. The nominal annual interest rate in the United States is $3$ percent. You expect that annual inflation will be about $4$ 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\mathrm{.}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.

The inflation differential suggests that the Singapore dollar should

$-$Select$-$ rise or decline

slightly. Yet, the forward rate would have a large

$-$Select$-$ premium or discount

due to the interest differential. Thus, the forward rate would predict a very

$-$Select$-$ weak or strong

Singapore dollar, which means that it would

$-$Select$-$ overestimate, underestimate, or unbiased estimate

the future spot rate.