In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (e_fwd) of a foreign currency would a Speculator have an incentive to sell foreign currency in the forward market?

Question

Quizplus · Accepted Answer

If the expected future spot rate is lower than the current forward rate, this means that the speculator expects the foreign currency to depreciate in the future. Therefore, the speculator would want to sell the foreign currency now in the forward market to lock in the higher current forward rate, and then buy it back in the spot market at the lower expected future spot rate to make a profit.

In Which of the Following Relationships Between the Expected Future