The Continuously-Compounded Forward-Interest-Rate Curve for Euros Lies Above That for Dollars

question 9

Multiple Choice

The continuously-compounded forward-interest-rate curve for euros lies above that for dollars up to five years in maturity and then crosses below the dollar forward curve.The current spot exchange rate is $1.50/€.What is the most valid statement of the following?

• A)The forward exchange rate ($/€)will always be less than 1.50 for all maturities up to five years.
• B)The forward exchange rate ($/€)will always be greater than 1.50 for all maturities greater than five years.
• C)The forward exchange rate ($/€)will always be less than 1.5 for all maturities greater than five years.
• D)There is insufficient information to be able to make any definitive statements about the forward exchange rate.

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