Currently, interest rate on euro is near zero while the (Fed Funds) interest rate on dollar...
Currently, interest rate on euro is near zero while the (Fed Funds) interest rate on dollar is about 2.5%. We expect the 6-month forward rate of euro (vs dollar) to be higher than the spot rate of euro. Please indicate if this statement is true and provide a short explanation.
Homework Answers
The statement is false because 6-month forward rate of euro will be lower than the spot rate.
As per interest rate parity, A country's currency which is offering higher interest rate will trade at premium and be expensive compared to a country's currency which is offering lower interest rate.
As interest rate on euro is near zero and on dollars it is 2.5% which is higher than euro, so investors will invest in dollars instead of euro. this will increase the demand of dollars and make it expensive as well as it's forward rate higher than euro.
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