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

question 6

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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Definitions:

Monopolistically Competitive Firm

A company operating in a market structure where many firms sell products that are similar but not identical, allowing for product differentiation and some degree of market power.

Perfectly Competitive Firm

A company that operates in a market where there are many buyers and sellers, none of which can influence the market price.

Long-Run Equilibrium

A state where all factors of production in an economy are fully adjusted to market conditions, leading to stable prices and full employment of resources.

Profit Maximization

The method a company uses to decide the price and production amount that yields the highest profit.