Q. Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.
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(A)
The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.
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(B)
The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
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(C)
The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.
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(D)
The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
✅ Correct Answer: (B)
The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.