If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
A) put option
B) forward
C) call option
D) None of these are correct.

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward exchange rate should equal the spot exchange rate adjusted for the interest rate differential between the two currencies. Therefore, if there are no transaction costs, a money market hedge (i.e. borrowing in one currency to invest in another currency) should yield the same result as a forward contract. Put and call options involve paying a premium and do not necessarily provide the same result as a money market hedge.

If Interest Rate Parity Exists, and Transaction Costs Do Not