Cedar Falls Co has a subsidiary in Brazil, where local interest rates are high It considers borrowing dollars and hedging the exchange rate risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to make loan payments in dollars Assume that forward ...

Because of interest rate parity the forward rate of the real ...

Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing

Question:

Cedar Falls Co. has a subsidiary in Brazil, where local interest rates are high. It considers borrowing dollars and hedging the risk by selling the Brazilian real forward in exchange for dollars for the periods in which it would need to make loan payments in dollars. Assume that forward contracts on the real are available. What is the limitation of this strategy?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...