Explanation:

• Option A (Incorrect): Real exchange rates are indexes constructed by economists to assess changes in the relative purchasing power of currencies. They are not based on an arbitrage relationship.

• Option B (Correct): Forward exchange rates are derived from an arbitrage relationship that equates the returns on two equivalent investments, involving the risk-free interest rates of the two countries. The formula for this relationship is: $F_{t}^{d} = S_{t}^{d} \times \frac{1 + i_{f}}{1 + i_{d}}$ where:

  • $F_{t}^{d}$ is the forward rate,
  • $S_{t}^{d}$ is the spot rate,
  • $i_{f}$ is the foreign risk-free interest rate,
  • $i_{d}$ is the domestic risk-free interest rate.

• Option C (Incorrect): Nominal exchange rates reflect the market value of one currency relative to another, determined by factors like capital and trade flows. While arbitrage ensures consistency in cross-rate quotes, the relationship does not involve relative interest rates.