Suppose You Observe the Spot Euro at $1

question 36

Multiple Choice

Suppose you observe the spot euro at $1.38/€ and the three month euro futures at $1.379/€.Based on carry arbitrage,you conclude

• A)this futures market is inefficient because the futures price is below the spot price
• B)this futures market is indicating that the spot price is expected to fall
• C)the spot price is too high relative to the observed futures price
• D)the risk-free rate in Europe is higher than the risk-free rate in the U.S.
• E)none of the above

---

Definitions:

Hedge Ratio

A ratio used to measure the proportion of a position that is hedged or the amount of assets used to hedge a risk exposure.

Dynamic Hedging

Constant updating of hedge positions as market conditions change.

Delta Neutral

The value of the options portfolio is not affected by changes in the value of the underlying asset.

Elasticity

A measure of how much the demand or supply of a product or service changes in response to a price or income change.