The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34.The difference between the two rates means
A)interest rates are higher in the U.S.than in Germany
B)the euro has risen in relation to the dollar
C)the inflation rate in Germany is declining
D)the euro is expected to fall in value relative to the dollar

Question

Quizplus · Accepted Answer

The difference between the spot rate and the forward rate, where the forward rate is higher than the spot rate, suggests that interest rates are higher in the U.S. than in Germany. This is because investors demand a higher return (reflected in the forward rate) for holding a currency expected to depreciate due to lower interest rates in its home country.

The Spot Rate on the Euro Is $1