If interest rate parity exists,and transaction costs do not exist,the _________ hedge will yield the same result as the _________ hedge.
A) money market;futures
B) money market;options
C) money market;forward
D) forward;options

Question

Quizplus · Accepted Answer

According to interest rate parity, the difference in interest rates between two currencies should be reflected in the forward exchange rate. Therefore, a money market hedge and a forward hedge should yield the same result. However, options and futures contracts have additional costs and risks associated with them, such as premium payments and margin requirements, which may affect the outcome of the hedge. Therefore, the best choice is C, the money market hedge and the forward hedge.

If Interest Rate Parity Exists,and Transaction Costs Do Not Exist,the