If interest rate parity exists and transactions 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) A and D

Question

Quizplus · Accepted Answer

If interest rate parity exists and transactions costs are zero, then both the forward and money market hedge will provide the same result. Therefore, the hedging of payables in euros with a forward hedge will have the same result as a money market hedge on payables. Options are not relevant options in this scenario. Choice A and B are incorrect. Choice D is also incorrect because a forward hedge and a money market hedge require the same amount of dollars for the hedge.

If Interest Rate Parity Exists and Transactions Costs Are Zero