If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.

Question

Quizplus · Accepted Answer

Interest rate parity ensures that the forward exchange rate is set so that arbitrage opportunities are eliminated, but an option hedge, which involves the use of options contracts to hedge against currency risk, provides a different outcome compared to no hedge at all because it offers the right but not the obligation to exchange currency at a predetermined rate, thus potentially leading to different financial results due to the premium paid for the options and the flexibility they offer in response to currency movements.

If Interest Rate Parity Exists, and Transaction Costs Do Not