Translation exposure; interest rate parity
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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.
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A perfect hedge (full coverage) on translation exposure can usually be achieved when:
Ans - none of the above, since ...
Purchase this Solution
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