Question

If the euro is selling for $1.45 in the spot market and $1.28 in the three-month forward market, which of the following is true?

Multiple Choice

• The dollar is selling at a premium relative to the euro.

• The forward market is out of equilibrium.

• The spot market is out of equilibrium.

• The euro is expected to depreciate in value.

• The euro is selling at a premium relative to the dollar.

Answer 1

At spot exchange rate a euro can buy 1.45 USD but in 3 months forward market, a euro can buy only 1.28 USD. From this we can say that euro is depreciated in value.

Hence, correct option is “The euro is expected to depreciate in value.”