Question : The rate at which one currency can be exchanged for another in the future is known as the ________ exchange rate.
Option 1: spot
Option 2: forward
Option 3: real
Option 4: nominal
Correct Answer:
forward
Solution : The correct answer is (b) forward.
The forward exchange rate is the rate at which one currency can be exchanged for another at a specified future date. It is a contractual rate agreed upon between two parties to exchange currencies at a future date. The forward exchange rate is determined by the prevailing spot exchange rate and the interest rate differentials between the two currencies. It is commonly used by businesses and investors to hedge against future currency fluctuations and to plan their international transactions. The forward exchange rate allows parties to lock in an exchange rate in advance, providing certainty for future transactions involving different currencies.
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