- This topic has 5 replies, 5 voices, and was last updated Mar-188:20 am by
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Up1
If the spot exchange rate is 1.100 USD/EUR and 6 month forward rate 1.133 USD/EUR, the market consensus expectations is that the EUR will appreciate. True or False. ?
I thought true – b/c 6 months from now it take .033 more USD to purchase 1 EUR; so the EUR would have appreciated in terms of USD. Can someone please explain why this is False?
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Up2
I would initially agree with you @peekabooitsme as well…. Are we missing something? Interest rates?
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Up2
Hmm… Would have thought the same. Or the EUR will depreciate… (same thing)… Which problem is this in the book?
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Up2
Only way the answer is actually false is if it meant [expected] spot rate?
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Up1
What? I don’t get it. Surely then that context has to be included with the question?
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Up0
It was from the slides in the Schweser class.
The response by the instructor: This is a simple case of
the forward market being in contango with the forward rate being above the
current spot rate. In this situation as the contract matures the forward rate
will converge to the spot rate and since the forward rate is above the spot
rate the forward rate will fall so if you had bought the EUR at the forward
rate of 1.133 USD/EUR at maturity of the contract you would suffer a loss
because the spot rate at maturity would be below the forward rate of 1.133
USD/EUR. You would be paying more for the EUR than it would currently be worth.If they asked this on the exam I think I would still get it wrong.
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