Assume that interest rate parity exists and will continue to exist. As of this morning, the 1-month interest rate in the United States was higher than the 1-month interest rate in the eurozone. Assume that as a result of the European Central Bank’s monetary policy this afternoon, the 1-month interest rate of the euro increased, and is now higher than the U.S. 1-month interest rate. The 1-month interest rate in the United States remained unchanged. Based on the information,
a. Do you think the 1-month forward rate of the euro exhibited a discount or premium this morning?
b. How did the forward premium changes this afternoon?
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