When the yen (JPY) is selling at a premium in the forward market, the Euro (EUR) price of the yen in the forward market (i.e. EUR/JPY) would be ________ the spot price of EUR/JPY.

A. larger than B. the same as C. smaller than

According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the _________ to ___________ .

A.

GBP/USD; increase

B.

GBP/USD; decrease

C.

GBP/USD; remain unchanged

A. larger than

B. GBP/USD; decrease

Step-by-step explanation

A forward premium occurs when the forward or anticipated future valuation of a currency is higher than its spot price indicating that the present domestic exchange rate will rise against the other currency. This situation can be perplexing since a rising exchange rate indicates that the currency's value is dropping in value. The disparity between the current spot rate and the forward rate is commonly used to calculate a forward premium, and so it's logical to expect that the future spot rate would be the same as the current futures rate. Generally, a forward premium demonstrates potential changes caused by interest rate differentials between the two currencies affected. Forward currency exchange rates are frequently different from the currency's spot exchange rate. When the forward exchange rate for a certain currency is greater than the spot rate, that currency has a premium. When the forward exchange rate is less than the spot rate, the currency has a discount.
The International Fisher Effect (IFE) refers to an exchange-rate method used to predict and understand present and future spot currency price variations based on present as well as future risk-free nominal interest rates instead of pure inflation. For this strategy to be effective, the risk-free elements of capital must be able to freely float between countries which constitute a specific currency pair. The IFE forecasts that the country with a greater annual interest rate ( the Great Britain) would see its currency drop in value. The anticipated future spot rate is gotten by multiplying the current spot rate by a foreign interest rate to domestic interest rate ratio. The IFE anticipates that the GBP will lose value against the USD, resulting in the same average return for venture capitalists in both currencies(that is a venture capitalist in USD would gain a lesser rate of interest of 5 percent but would also benefit from appreciation of the USD).