Determination of forward rates is explained by

A. Purchasing power parity theory

B. Uncovered interest arbitrage

C. Demand and Supply for spot currency

D. demand and supply of currency in future

Answer: Option A

Solution(By Examveda Team)

Determination of forward rates is explained by Purchasing power parity theory. Purchasing Power Parity says that since they are the same goods, the purchasing power in the countries should be the same. This doesn't mean the exchange rate should be equal to one; it means the ratio of price to exchange rate should be one.