ACCA · Question 30 · Risk Management
Section B - Case 3: LithiumX
Scenario: LithiumX is a cross-border mining company based in the US. It expects to receive €2,000,000 in exactly 3 months from a European client.
Spot exchange rate: €1.1500 - €1.1550 / $1
3-month forward rate: €1.1600 - €1.1640 / $1
US interest rates: 4% borrow, 2% deposit (annual)
Euro interest rates: 5% borrow, 3% deposit (annual)
Question: According to Interest Rate Parity (IRP), why is the 3-month forward rate higher (more Euros per Dollar) than the spot rate?
Answer options:
Because US inflation is higher than Eurozone inflation.
Because Euro interest rates are higher than US interest rates.
Because US interest rates are higher than Euro interest rates.
Because the market expects the Euro to appreciate against the Dollar.
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