Changes in the Forward Rate
Response to the following problem:
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.
a. Based on the information, do you think the 1-month forward rate of the euro exhibited a discount or premium this morning?
b. How did the forward premium change this afternoon?