If Interest Rate Parity Exists and Transactions Costs Are Zero

question 81

Multiple Choice

If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will ____.

• A) have the same result as a call option hedge on payables
• B) have the same result as a put option hedge on payables
• C) have the same result as a money market hedge on payables
• D) require more dollars than a money market hedge
• E) A and D

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Definitions:

Demand-Side

Pertaining to the aspects of the economy influenced by consumer spending and preferences, impacting overall demand for goods and services.

Market Failure

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or asymmetric information, or because markets fail to provide desired public goods.

Producer

An individual, company, or entity that creates goods or services to satisfy consumer demands.

Consumers

Individuals or entities that purchase goods and services for personal use or consumption.