Suppose for two currencies the forward premium is 4% and the expected premium is 8%.Then the risk premium is:
A) -4%
B) -2%
C) 2%
D) 4%

Question

Quizplus · Accepted Answer

The risk premium is calculated as the difference between the expected premium and the forward premium, which is 8% - 4% = 4%. However, since the forward premium is lower, the risk premium is negative, indicating that the expected return exceeds the forward rate, thus -4%.

Suppose for Two Currencies the Forward Premium Is 4% and the Expected