If e is the current spot rate (units of home currency per unit of foreign currency), e_fwd is the current three-months forward rate, E(e) is the expected spot rate in three months, and xa is the expected rate of depreciation of the home currency in three months, then, in an efficient foreign exchange market, A) E(e) = e_fwd. B) e = e_fwd. C) xa = e_fwd. D) E(e) = e.

Question

Quizplus · Accepted Answer

In an efficient foreign exchange market, the current exchange rate and the current forward exchange rate should reflect all available information, including expectations about future exchange rate movements. Therefore, the expected spot rate in three months (E(e)) should be equal to the current three-month forward rate (e_fwd) since both reflect the market's expectations. Therefore, A is the correct choice.

If E Is the Current Spot Rate (Units of Home