Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.
A) put upward pressure on; put upward pressure on
B) put downward pressure on; put upward pressure on
C) put upward pressure on; put downward pressure on
D) put downward pressure on; put downward pressure on

Question

Quizplus · Accepted Answer

When U.S. investors lock in a higher foreign return, they would need to buy the foreign currency, increasing demand, and therefore, putting upward pressure on the currency's spot rate. At the same time, the higher demand for foreign currency futures contracts would put downward pressure on the currency's futures price. Therefore, the correct answer is C, which states that the actions of U.S. investors would put upward pressure on the currency's spot rate and put downward pressure on the currency's futures price.

Assume That a Currency's Spot and Future Prices Are the Same