A perfect hedge (full coverage) on translation exposure can usually be achieved when:
using the money market hedge.
using the forward hedge.
using the futures hedge.
none of the above, since a perfect hedge is nearly impossible.

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.
U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.
U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.
U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

Solution Preview

A perfect hedge (full coverage) on translation exposure can usually be achieved when:

Ans - none of the above, since ...

Solution Summary

In a sentence each, the solution gives the answer and the reason for the answer.

1) Assume that interestrateparity holds, and the euro's interestrate is 9% while the U.S. interestrate is 12%. Then the euro's interestrate increases to 11% while the U.S. interestrate remains the same. As a result of the increase in the interestrate on euros, the euro's forward _______ will _______ in order to maintain i

Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over a

1. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian
dollar is $.80. If you use a forward hedge, you will-
a. receive $750,000 today.
b. receive $750,000 in 90 days.
c. pay $750,000 in 90 days.
d. receive $480,000 today.
e. receive $480,000 in 90 days
2. With regard to hedgin

Please answer the following two problems:
1: InterestRateParity
The current 90-day interestrate in the United States is 1 percent. The current 90-day interestrate in France is 2
percent. The current spot rate for the French franc (FF) is $0.18679/FF. If the interestrateparity (IRP) holds between the United States an

Consider the following financial data:
UK DM
Inflation (expected annual) 10% 4%
1 Year InterestRate 12% ??
Spot Exchange Rate (DM/pound) 3
Assuming the international par

The spot exchange rate between the U.S. dollar and the German mark is $.5500/DM. The dollar deposit rate is 8 percent and the DM deposit rate is 4 percent.
a. What is covered interestparity? What is the six-month forward rate if covered interestparity holds?
b. What is the unbiased forward rate hypothesis? If the unbias

Assume that InterestRateParity holds. The spot rate for the Euro is $1.20 and the one year forward rate is $1.23. The annual rate of interest in Germany on annual deposits is 2.439%. What is the annual rate of interest on deposits in the United States?

SUPPOSE THE SPOT RATE FOR THE POUND,MARK,AND SWISS FRANC ARE $1.30;$.35;AND$.40,RESPECTIVELY.THE ASSOCIATED 90-DAY INTERESTRATES(ANNUALIZED)ARE 16%;8%AND 4%WHILE THE US.90-DAY INTERESTRATE(ANNUALIZED)IS 12%.WHAT IS THE 90-DAY RATE ON AN ACU(ACU1=1POUND+1DM+1SFR)IF INTERESTPARITY HOLDS?