Suppose that on January 1,1987,the spot rate on the Dutch guilder was $0.39 and the 180-day forward rate was $0.40.The difference between the spot and forward rates suggested that
A)interest rates were higher in the U.S.than in the Netherlands
B)the guilder had risen in relation to the dollar
C)the inflation rate in the Netherlands was declining
D)the guilder was expected to fall in value relative to the dollar

Question

Quizplus · Accepted Answer

The difference between the spot and forward rates, with the forward rate being higher than the spot rate, suggests that interest rates were higher in the U.S. than in the Netherlands. This is because investors demand a higher forward rate for holding a currency expected to yield lower interest returns.

Suppose That on January 1,1987,the Spot Rate on the Dutch