Correct Answer: (b) Is equal to the forward rate.
According to the Unbiased Expectations Theory, the forward rate is an unbiased predictor of the future spot rate.
In simpler terms, the theory suggests that the forward rate today reflects what the market expects the spot rate to be in the future.
For example:
Suppose the current one-year forward exchange rate is 1.20 U.S. dollars per euro.
Under the Unbiased Expectations Theory, the expected spot exchange rate one year from now would also be 1.20 U.S. dollars per euro.
This does not mean the actual future spot rate will definitely equal 1.20. Exchange rates can change unexpectedly due to economic conditions, interest rates, and other factors.
Instead, the theory states that the forward rate equals the expected future spot rate, assuming no risk premium.
Final Answer: (b) Is equal to the forward rate.
