Whenever a nation's currency is expected to depreciate because of various market conditions, the following situation exists regarding its forward rate for another currency:
A) there is a forward discount from the spot rate by the rate of depreciation.
B) there is a forward premium from the spot rate by the rate of depreciation.
C) there is no difference between the spot and forward rates.
D) there is no predictable relationship between the spot and forward rates.

Question

Quizplus · Accepted Answer

When a currency is expected to depreciate, the forward rate for another currency will have a premium from the spot rate by the rate of depreciation. This is because investors will demand a higher return (through the premium) to compensate for the expected loss in value of the currency being exchanged. Therefore, choice B is the correct answer.

Whenever a Nation's Currency Is Expected to Depreciate Because of Various