Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.
A) put upward pressure on; put upward pressure on
B) put downward pressure on; put upward pressure on
C) put upward pressure on; put downward pressure on
D) put downward pressure on; put downward pressure on

Question

​Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.
A) ​put upward pressure on; put upward pressure on
B) ​put downward pressure on; put upward pressure on
C) ​put upward pressure on; put downward pressure on
D) ​put downward pressure on; put downward pressure on

Quizplus · Accepted Answer

When U.S. investors act to lock in a higher foreign return, they need to buy the foreign currency, which puts upward pressure on the currency's spot rate. At the same time, they may sell futures contracts of the foreign currency to lock in the exchange rate and mitigate the risk of currency fluctuation, which puts downward pressure on the currency's futures price. Therefore, the correct choice is C.

​Assume That a Currency's Spot and Future Prices Are the Same

Assume That a Currency's Spot and Future Prices Are the Same