Question
(17) If Interest Rate Parity (IRP) holds, then hedging with forward contract should yield the same result as a money markets hedge. True or false?
- (17)
If Interest Rate Parity (IRP) holds, then hedging with forward contract should yield the same result as a money markets hedge. True or false? Using the data provided below, explain your answer. Simply stating true or false is not sufficient. Show all your calculations.
Data:
- Account receivable in one year from now: AD780,000; AD stands for Australian dollar
- Todays spot exchange rate: S(AD/$) = US$0.7528 per AD
- Annual interest rate (represents both the borrowing and lending rate)
- US = 2.5%
- Australia = 4.3%
- Assume IRP holds
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Practical Financial Management
Authors: William R. Lasher
8th edition
1305637542, 978-1305887237, 1305887239, 978-1305637542
