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)A and D

Question

Quizplus · Accepted Answer

Interest rate parity suggests that forward exchange rates should be equal to the expected future spot rates, which means that a forward hedge should have the same result as a money market hedge. Option hedges involve upfront costs, so they are not equivalent to a forward hedge. Additionally, since transaction costs are assumed to be zero, there is no reason to expect that a forward hedge would require more dollars than a money market hedge.

If Interest Rate Parity Exists and Transaction Costs Are Zero