Question
Which statement is true? 1) On any given currency pair and at any given time, the forward rate will be such that an investor that
Which statement is true?
1) On any given currency pair and at any given time, the forward rate will be such that an investor that believes in efficient markets will be indifferent as to whether he holds a bond in one of the quoted currencies or the other.
2) If an investor could earn unlimited amounts of money without taking any risk whatsoever, so Interest rate parity must hold.
3) Interest rate parity indicates that if an investor could earn a higher return investing in a foreign bond than he could by investing in a domestic bond, that higher return would be just offset by the cost of insuring that return with a financial hedge.
4) a hedger can predict, using interest rate parity, with a high level of accuracy, what the following week's or month's spot price will be. This is a key determinant in the decision of whether to hedge a given exposure.
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