When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.
A) upward; downward
B) upward; upward
C) downward; upward
D) downward; downward

Question

When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.​
A) ​upward; downward
B) ​upward; upward
C) ​downward; upward
D) ​downward; downward

Quizplus · Accepted Answer

If the futures price is above the forward rate, it implies that the futures price is overpriced relative to the forward rate. Hence, investors may attempt to sell the overpriced futures contracts and buy forward contracts, driving the forward rate up and pushing the futures rate down. This would result in upward pressure on the forward rate and downward pressure on the futures rate. Therefore, the correct choice is A.

When the Futures Price Is Above the Forward Rate, Astute