If interest rate parity exists, the forward hedge will always outperform the money market hedge.

Question

Quizplus · Accepted Answer

Interest rate parity refers to the equality of returns on investments in two different currencies, taking into account the exchange rate and interest rates. In theory, this means that the forward and money market hedge should offer similar returns. However, in practice, many factors can affect the effectiveness of the hedge strategies, and sometimes the money market hedge may outperform the forward hedge. Therefore, the statement that the forward hedge will always outperform the money market hedge is false.

If Interest Rate Parity Exists, the Forward Hedge Will Always