Assume the euro is selling in the spot market for $1.15. Simultaneously, in the three-month forward market the euro is selling for $1.17. Which one of the following statements correctly describes this situation?

Question

Quizplus · Accepted Answer

In the three-month forward market, the euro is selling for a higher price ($1.17) than in the current spot market ($1.15). This means that the euro is selling at a premium relative to the dollar. Therefore, the correct option is D.

Option A is incorrect because it assumes that the spot market is out of equilibrium without any indication.

Option B is also incorrect because the forward market is not necessarily out of equilibrium if the premium reflects the expected difference in interest rates between the two currencies.

Option C is incorrect because the dollar would be selling at a premium relative to the euro if it were the one trading at a higher price in the forward market.

Option E is not applicable to this situation since we have no information about the expected movement of the euro's value.

Assume the Euro Is Selling in the Spot Market for $1.15