Asked by Alexis WATKINS on Jul 25, 2024
Verified
Assume that the Euro is selling in the spot market for $1.10. Simultaneously, in the 3-month forward market the Euro is selling for $1.12. Which one of the following statements correctly describes this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the Euro.
D) The Euro is selling at a premium relative to the dollar.
E) None of the other four statements correctly describes this situation.
Premium
An amount paid in excess of the regular price, often associated with insurance costs or the additional cost to buy an asset.
Euro
The official currency of 19 of the 27 European Union countries, which constitutes the Eurozone.
Spot Market
A market in which financial instruments or commodities are traded for immediate delivery and payment, contrasting with futures markets where delivery is set at a future date.
- Absorb the explanation and determination mechanisms of spot and forward exchange rates.
Verified Answer
LM
laurenny massaJul 29, 2024
Final Answer :
D
Explanation :
The Euro is selling at a premium relative to the dollar in the forward market because it costs more ($1.12) in the future than it does currently in the spot market ($1.10). This indicates that the Euro is expected to be stronger or more valuable relative to the dollar in the future.
Learning Objectives
- Absorb the explanation and determination mechanisms of spot and forward exchange rates.