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The Continuously-Compounded Forward-Interest-Rate Curve for Euros Lies Above That for Dollars

Question 3

Multiple Choice

The continuously-compounded forward-interest-rate curve for euros lies above that for dollars up to five years in maturity and then crosses below the dollar forward curve. The current spot exchange rate is $1.50/€. What is the most valid statement of the following?


A) The forward exchange rate ($/€) will always be less than 1.50 for all maturities up to five years.
B) The forward exchange rate ($/€) will always be greater than 1.50 for all maturities greater than five years.
C) The forward exchange rate ($/€) will always be less than 1.5 for all maturities greater than five years.
D) There is insufficient information to be able to make any definitive statements about the forward exchange rate.

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