If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:
A) have the same result as a call option hedge on payables.
B) have the same result as a put option hedge on payables.
C) have the same result as a money market hedge on payables.
D) require more dollars than a money market hedge.
E) have the same result as a call option hedge on payables AND require more dollars than a money market hedge.

Question

Quizplus · Accepted Answer

If interest rate parity exists and transaction costs are zero, then a money market hedge will provide the same result as a forward hedge or an options hedge. However, a money market hedge is typically the most cost-effective and efficient option, as it involves borrowing in the currency of the payables and investing in the currency of the firm. Therefore, a money market hedge would be the best option in this scenario.

If Interest Rate Parity Exists and Transaction Costs Are Zero