Question

The best interpretation of the forward discount shown is that:

a. The euro is expected to depreciate over the next 30 days.
b. One-month UK interest rates are higher than those in the Eurozone.
c. One-month Eurozone interest rates are higher than those in the United Kingdom.
d. The exchange rate will remain constant.

Answer 1

a. The euro is expected to depreciate over the next 30 days.

A forward discount suggests that the euro is expected to depreciate over the next 30 days, likely due to lower Eurozone interest rates compared to another economy.

Step-by-step explanation:

The best interpretation of the forward discount is that the euro is expected to depreciate over the next 30 days. A forward discount occurs when the forward exchange rate is lower than the current exchange rate. Given that currencies with lower interest rates tend to depreciate because of capital flows moving towards currencies with higher interest rates, this discount suggests that investors anticipate the euro will lose value relative to another currency, likely due to the expectation of one-month Eurozone interest rates being lower than those in the comparative economy, such as the United Kingdom.