Question 1. Smith is a currency trader and is reviewing forward foreign exchange rates. His investors have made several statements regarding foreign exchange rates. Which of the following statements is correct and can help Smith predict future spot exchange rates? According to the foreign exchange expectation relation forward:
A) discounts and premiums can be unbiased predictors of expected changes in spot exchange rates.
B) rates are biased predictors of expected changes in spot exchange rates.
C) discounts and premiums can be effective predictors of expected spot exchange rates.
D) rates are unbiased predictors of interest and inflation rates.
Question 2. Jones is an international currency portfolio manager seeking speculative opportunities in the euro. While reviewing the forward rates for the euro, he notices that there is a forward premium of 4.25 percent on the euro to the U.S. dollar (EUR/USD). Which of the following statements is correct? The euro is expected to:
A) depreciate 4.25 percent against the U.S. dollar.
B) appreciate at least 4.25 percent against the U.S. dollar.
C) appreciate 4.25 percent against the U.S. dollar.
D) depreciate at least 4.25 percent against the U.S. dollar by the premium implied in the euro forward rate.