If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
A)put option
B)forward
C)call option
D)none of the above

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward exchange rate should equal the expected future spot exchange rate, which eliminates any potential gains or losses from using a money market hedge. If transaction costs do not exist, there would be no advantage to using a more complex financial instrument such as a put or call option, so the best option would be the forward hedge.

If Interest Rate Parity Exists, and Transaction Costs Do Not