If the euro is selling for $1.45 in the spot market and $1.28 in the three-month...

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.

Solutions

Expert Solution

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.”

jeff jeffy answered 2 years ago

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