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Currency Exchange Rates

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The spot rate for one Australian dollar is US $0.92685 and the 60-day forward rate is US $0.93005. Which one of the following statements is consistent with these facts?

The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
The U.S. dollar is trading at a forward premium with respect to the Australian dollar.
The U.S. dollar has lost purchasing power with respect to the Australian dollar.
The U.S. dollar has gained purchasing power with respect to the Australian dollar.

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct. The exchange rate for the Australian dollar is higher in the forward market than the spot market; the Australian dollar is therefore trading at a forward premium. From this, it follows that the U.S. dollar is trading at a forward discount.

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