Forecasting with a Forward Rate
Response to the following problem:
Assume that the 4-year annualized interest rate in the United States is 9 percent and the 4-year annualized interest rate in Singapore is 6 percent.
Assume interest rate parity holds for a 4-year horizon.
Assume that the spot rate of the Singapore dollar is $.60.
If the forward rate is used to forecast exchange rates, what will be the forecast for the Singapore dollar's spot rate in 4 years?
What percentage appreciation or depreciation does this forecast imply over the 4-year period?