in 2014, textbook Reading 28, question 22

In textbook 292, reading 28, question 22, the third paragraph says “due to recent monetary tightening by the Riksbank forward points for the SEK/EUR rate have swung to a premium.”

I do not understand the relationship. If the monetary policy is tighten, then there is less money supply, which means SEK will appreciate. So the SEK/EUR will decrease in the future (e.g. from 3 SEK per EUR to 2.5 SEK per EUR). Then the forward rate of SEK/EUR will decrease, which means a forward discount. Then why “forward points for the SEK/EUR rate have swung to a premium”?


I think because the forward rate will reflect the interest rate parity relationship. Since Riskbank raised rates relative to EUR, EUR should trade at a forward premium.

Hope it helps

The forward rate you seek is EUR/SEK, not SEK/EUR. SEK/EUR will have negative forward points; EUR/SEK will have positive forward points.

S2, where did you get this, it says the SEK/EUR is at a forward premium.

All I’m saying is that if you want to know whether SEK is appreciating or depreciating, look at EUR/SEK, not SEK/EUR. If EUR/SEK increases, SEK is appreciating; if EUR/SEK decreases, SEK is depreciating.

S2000 - I am having trouble understanding the same question. Why would nominal rates for the SEK be expected to increase for tight monetary policy? Wouldn’t tight monetary policy = low expected inflation, and thus lower nominal rates? Confused as to why nominal rates would increase?

Tight monetary policy means raising interest rates.

Inflation will likely decline, but real rates will increase more; the net effect is higher nominal rates.