The ________ in the forward exchange market is equal to the effective return differential.
A) Strike price
B) Exposure risk
C) Future spot exchange rate
D) Risk premium

Question

Quizplus · Accepted Answer

The risk premium in the forward exchange market represents the market's expectation of changes in the future spot exchange rate. In other words, it is equal to the effective return differential between two currencies. Therefore, D is the correct choice. The strike price is the price at which an option can be exercised, exposure risk refers to the potential loss from fluctuations in a currency's value, and the future spot exchange rate is the expected exchange rate at a future date.

The ________ in the Forward Exchange Market Is Equal to the Effective