Q4.
(a) Mr. Shanku has borrowed dollars in the U.S., but is now concerned about its currency risk. What alternatives does he have to limit his risk? Be specific in your recommendation.
(b) Mr. Shanku wonders whether it is reasonable to expect real rates of interest to be identical across countries. He is curious to know what this implies about parity. Explain your answer(s) clearly to Mr.Shanku.
a. To reduce foreign exchange risk. Mr. Shanku could use forward contracts, options, or futures contract. Forward contracts are agreements between two parties to fix the exchange rate between them. A currency futures contract is also an agreement between two parties to buy or sell a particular currency at a future date, at a fixed rate. It differs from a forward contract in that these contracts are much more liquid, and in fact are bought and sold ...
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