Forecasting the 2-Year and 4-Year Exchange Rates

How to forecast the two-year and four-year exchange rates for the SGD/AUD?

The CEO requires a forecast of the two-year and four-year exchange rates for the SGD/AUD calculated based on Purchasing Power Parity (PPP) and the International Fisher Effect (IFE).

  • Calculate the two-year forward SGD/AUD exchange rate based on PPP.
  • Calculate the four-year forward SGD/AUD exchange rate based on PPP.
  • Calculate the two-year forward SGD/AUD exchange rate based on IFE.
  • Calculate the four-year forward SGD/AUD exchange rate based on IFE.

Explain the conditions under which the forward exchange rates calculated by you will be unbiased predictors of the future spot exchange rate.