Question

Let RUS be the annual risk free rate in the United States, RUK be the risk free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true?

A. if RUS > RUK, then E > F
B. if RUS < RUK, then E < F
C. if RUS > RUK, then E < F
D. if RUS < RUK, then F = E E.
There is no consistent relationship that can be predicted.

Answer 1

If RUS > RUK, then E < F ( C )

Step-by-step explanation:

RUS = annual risk free rate in united states

RUK = annual risk free rate in United kingdom

F = futures price of $/BP for 1 year

E = spot exchange rate for $/BP

To get a higher the future price

this conditions must be met

The annual risk free rate of the united states must be higher than the annual risk free rate of the united kingdom. if this condition is met then the the British pound will have a forward premium ( F ) > ( E )