Forecasting Based on the IFE
Response to the following problem:
The prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. However, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.