Suppose you observe the spot euro at $1.38/€ and the three month euro futures at $1.379/€.Based on carry arbitrage,you conclude
A)this futures market is inefficient because the futures price is below the spot price
B)this futures market is indicating that the spot price is expected to fall
C)the spot price is too high relative to the observed futures price
D)the risk-free rate in Europe is higher than the risk-free rate in the U.S.
E)none of the above

Question

Quizplus · Accepted Answer

The futures price being lower than the spot price suggests that the risk-free rate in Europe is higher than in the U.S., as the futures price reflects the cost of carry, which includes interest rate differentials.

Suppose You Observe the Spot Euro at $1