Suppose that: $$\begin{array}{l}
\begin{array} {lll }
\text {U.K. (pound)}
&\frac { \text { Spot Rate } } { 1.5331 }
&\frac { 3 \text { Month Forward Rate } } { 1.5372 }
&\frac { 1 \text { Year Forward Rate } } { 1.5502 }
\end{array}
\end{array}$$ If no other information is available, what will your guess about the spot rate in one year be?
A)1.5331
B)1.5372
C)1.5502
D)2.0000

Question

Suppose that: $$\begin{array}{l}
\begin{array} {lll } 
\text {U.K. (pound)}
&\frac { \text { Spot Rate } } { 1.5331 }
&\frac { 3 \text { Month Forward Rate } } { 1.5372 }
&\frac { 1 \text { Year Forward Rate } } { 1.5502 }
\end{array}
\end{array}$$ If no other information is available, what will your guess about the spot rate in one year be?
A)1.5331
B)1.5372
C)1.5502
D)2.0000

Quizplus · Accepted Answer

Given the information, the best guess for the spot rate in one year would be the 1-year forward rate, which is 1.5502. Forward rates are market participants' best estimates of future spot rates.

Suppose That If No Other Information Is Available, What Will Your Guess