Question

The euro is selling today in the spot market for $1.32 per euro. At the same time, the currency is selling for $1.25 per euro in the three-month forward market. Which of the following situation should be true?

Multiple Choice

• The forward market is out of equilibrium.

• The spot market is out of equilibrium.

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

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

• The euro is expected to depreciate in value.

Answer 1

The Euro is selling 1.32 dollars per Euro in spot market today and the euro is trading 1.25 Dollars per euro after 3 months, it means that the euro has depreciated in comparison with dollar and the dollar has appreciated in comparison with Euro in futures. It could also mean euro is selling at a premium in the spot market with relative to Dollars and dollars is selling at a discounting at spot market with relation to euro.

There is no concept of equilibrium here and dollar age is not selling at premium and the euro is expected to depreciate but only in comparison to dollars so All statements except Statement (D) which says the euro is selling at a premium today in spot market with comparison to dollar.