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:

AAR

Average Annual Return, which measures the average return on an investment over a multi-year period.

Multiple Rates Of Return

One potential problem in using the Internal Rate of Return method if more than one discount rate makes the Net Present Value of an investment zero.

Net Present Value

A process that evaluates how the worth of a dollar now compares to its worth in the future, factoring in both inflation and investment returns.

Discount Rate

This is the rate of interest utilized in discounted cash flow analysis to calculate the current worth of future cash flows.